California treasurer to cover bond payments for flood-damaged Tulare lab

The California State Treasurer's Office will pick up the tab for the May interest payment on bonds issued for a state research laboratory damaged by massive flooding in Tulare, a city in the state's agricultural stronghold in the Central Valley.

The California State Public Works board filed an event notice Thursday saying damage to the Alex Ardans Branch Laboratory in Tulare had rendered the animal health and food safety lab inoperable. Under the lease agreement with the Public Works Board, the state's Department of Food and Agriculture is not required to make lease payments on the SPWB lease revenue bonds Series I if the lab is damaged to the extent it can't be used for its intended purpose.

The bond payments are covered by the lease payments.

The State Public Works Board directed the state treasurer, as trustee under the indenture, to transfer funds to the revenue fund to make the debt service payment for the lab's portion due on May 1, 2023, according to the filing. The SPWB expects the state treasurer to transfer discretionary funds to make future bond payments as well.

The treasurer's office will pay the missing $164,488.40 of the $13.3 million May 1 payment on the board's 2013 Series I lease revenue bonds "using Build America Bond subsidies and future payments will be made from lawfully available sources as directed by the State Public Works Board," said Joe DeAnda, a spokesman for the California treasurer's office.

The treasurer's office isn't on the hook for the full bond payment because only $40 million of the original $630 million bond issuance was for the lab, said David Hitchcock, an S&P Global Ratings, senior director. The majority helped fund San Diego County's central courthouse, Hitchcock said.

The action will prevent the state agency from having to tap the master indenture reserve fund, which S&P wrote held $117.6 million as of Sept. 1, 2022.

"Although the SPWB does not intend to draw from the debt service reserve, it remains available in an amount we believe sufficient to pay debt service, even if the board did not pay debt service from other legally available funds," S&P analysts wrote.

S&P Global Ratings put out an advisory Friday informing investors that despite the pause in base rental payments that support the bonds, the debt service continues to be paid on the bonds. No rating action has been taken at this time.

"I think we have to see a little more about how much flood damage there is and how long before it will be repaired," said David Hitchcock, an S&P senior director. "Assuming though there is no flood insurance, that it will be repaired. We have to see if there is more to the story. If it's out of commission."

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The treasurer's office has used discretionary funds in the past to cover bond payments, when a project wasn't completed on time or there was earthquake damage, Hitchcock said.

Damage to the facility occurred on March 16 due to flooding caused by overflow from the nearby Tule River, according to the filing. Flooding has been so bad and damage so extensive in Tulare County that a lake bed dry through most of the 20^th century, once the largest west of the Mississippi, has reappeared for the first time since 1997. The lake has reconstituted several times in modern history during times of heavy rainfall.

Other than this series of bonds, the state is not aware of flood damage substantially impairing the use and occupancy of any other leased facility supporting SPWB issued bonds, DeAnda said.

S&P rates the bonds A-plus with a positive outlook; all SPWB bonds are rated one notch lower than the state's AA-minus rating, Hitchcock said.