SAN FRANCISCO — Dinuba plans to be the first municipality in California to sell refunding bonds for debt issued by a redevelopment agency since the statewide dissolution of those agencies.
Next week’s $1.65 million issue will culminate a messy process that included a $1.4 million note default.
The city of 22,000 in the Central Valley about 30 miles southeast of Fresno defaulted on a $1.4 million principal payment for subordinate tax-allocation notes due Oct. 1 as it waded through the process of getting approval for the sale.
“This will be the first issue that we know of that is being issued by a successor agency, tax allocation issue, under the new laws,” said Douglas Anderson, a managing principal with Urban Futures Inc., which advises Dinuba. “Unfortunately, Dinuba — the successor agency — got caught up in the dissolution process.”
The refunding bonds are rated BBB-minus with a stable outlook by Standard & Poor’s.
Anderson said the projected $1.65 million sale will price next week.
The default on the notes sold in 2009 appears to have occurred mainly because of the uncertain and lengthy approval process for selling the first tax-allocation refunding bonds since the state terminated its 400 or so local redevelopment agencies, or RDAs.
It is common for municipalities to issue short-term notes and then refund them before they are due, as Dinuba had planned.
The dissolution of California redevelopment in late 2011 threw a monkey wrench into the plan.
The Dinuba City Council and the oversight board that oversees the wind-down of the defunct RDA asked the state Department of Finance to approve the bond sale on Aug. 24.
It didn’t obtain approval until Oct. 25, more than three weeks after the principal was due. The Finance Department asked the city to structure the refunding bonds with level debt-service payments before consenting, according to a filing to the Municipal Securities Rulemaking Board.
Dinuba also had to wait for S&P to rate the deal before it could go to market.
The city owes noteholders a 12% interest rate on the outstanding debt because of the default, trustee U.S. Bank said in the filing to the MSRB.
Standard & Poor’s, which doesn’t cover the defaulted notes, said in a report released Thursday that it downgraded the underlying rating on Dinuba’s senior tax-allocation debt one notch to BBB-plus from A-minus for other reasons tied to the ending of redevelopment agencies.
“As long as the security wasn’t the one that was defaulting, we have actually in most cases put negative outlooks on the debt we rate given exposure to who knows what is going to happen,” Sussan Corson, an analyst for Standard & Poor’s, said in an interview.
Corson said in this case the city has a plan to take out the defaulted notes.
S&P cut the rating on the senior bonds because the city drew on debt-service reserves to make payments, replenishing them within a week, because of problems caused partly by the debt payment process created by the state to deal with the end of redevelopment.
The city’s RDA had $54 million of tax-allocation bonds — which excludes the defaulted notes — outstanding as of the end of June 2011, according to the city’s latest comprehensive annual financial report.
Since the state Supreme Court last year upheld a law dissolving California’s redevelopment agencies, the so-called successor agencies — in most cases, the municipalities that created RDAs — have scrambled to tally their debts and assets, get them approved by the state, and to make the required payments to the state and for debt service.
The review process involves oversight and review of RDA finances by a local oversight board, county auditor-controllers, the state controller’s office and the California Department of Finance.
Rating agencies have issued several warnings about the impact of the RDA unwinding on municipal finances, especially those that intermingled redevelopment funds with other city funds, and have handed out many downgrades and negative outlooks to RDA debt as a result.
Some cities filed lawsuits against the state over the shutdown of the redevelopment agencies.