ALAMEDA, Calif. — Rocked by the recession, the rural California city of Chowchilla has stopped making payments on the bonds it used to finance its city hall.
Trustee U.S. Bank issued a notice Monday that the city had not made a scheduled interest payment due Jan. 1.
The initial default occurred July 1 on an interest and principal payment for the Chowchilla Public Financing Authority’s 2005 lease-revenue refunding bonds. The $5.9 million issue was used to finance renovation of a commercial building into Chowchilla’s current city hall.
The recession has hit the city hard. Its 17.9% unemployment rate is considerably higher than the statewide 12.4% jobless rate.
The city is located in the agricultural Central Valley, about 30 miles north of Fresno and 140 miles south of Sacramento. The population of 18,700 includes 7,700 prisoners at its two state prisons.
City officials didn’t return a phone call Wednesday.
According to a presentation assistant city administrator Wayne Padilla prepared in December for the City Council, Chowchilla expects to bring in $4.1 million in general fund revenue during the current fiscal year, which runs through June 30, but has $5.3 million in budgeted expenses.
An earlier appreciation of that shortfall prompted the council to vote in June to skip the lease payments for the civic center bond, which cost about $367,000 a year.
Chowchilla has also imposed layoffs and unpaid furloughs on employees. Padilla, in another presentation to the City Council, said he does not recommend bankruptcy as a means for addressing the financial crisis, because of its high costs.
Officials have reviewed contracting services out to Madera County, according to Padilla’s presentations. Local newspaper reports indicate there is even talk about disincorporation as a last resort.
According to the U.S. Bank trustee disclosures, the bonds originally held a $366,731 debt reserve, or about one year of debt service.
That reserve was drawn down by $249,645 to make the July 2010 interest and principal payments, leaving $117,086 remaining.
The bonds were sold in 2005, backed by what was then the triple-A ratings of XL Capital Assurance. There was no underlying rating, according to the official statement. Piper Jaffray & Co. was the underwriter.
XL, now known as Syncora Guarantee, was among the bond insurers dragged down by heavy exposure to mortgage-related products and credit-default swaps, and it stopped writing policies in March 2008.
In its disclosure, U.S. Bank said it filed a claim for the January interest payment with Syncora on Jan. 1 but had not received a response as of Jan. 3. Syncora’s spokesman did not return a phone call Wednesday.
The firm resumed making bond-insurance claim payments last year after a regulator-imposed hiatus.
Syncora’s regulator, the New York Insurance Department, in 2009 banned the firm from paying insurance claims as it restructured to clean up its balance sheet. That ban was lifted in June and the insurer began paying claims in July.
However, Syncora’s third-quarter 2010 financial statements, released in November, indicate that insolvency in the near term remains a possibility because of its limited surplus and liquidity if its insured obligations see adverse developments.
Syncora currently carries a Ca rating and a developing outlook from Moody’s Investors Service. Standard & Poor’s assigns the credit an R for “regulatory intervention.”