LOS ANGELES — Fitch Ratings on Thursday downgraded $19 million of outstanding lease revenue bonds issued by El Monte, the 10th largest city in Los Angeles County, from A-minus to BB-plus and put the city on negative credit watch.
According to El Monte’s finance director, Julio Morales, the downgrade was based on short-term cash-flow problems due mainly to California’s dissolution of its redevelopment agencies.
“The legislation was written in haste and the devil is truly in the details,” Morales said. “The important thing is I talked to the county this morning and we’ve sent them information. We have established a dialogue and hope to clarify things before [payments on] the 2007 TAB bond issue and certainly before the 2010 bond issue” comes due.
Fitch’s downgrade was made as part of regular surveillance efforts.
“The downgrade reflects Fitch’s concern about the city’s willingness to adhere to its financial agreements, including the covenant to budget and appropriate for use and occupancy of the civic center complex from any available funds,” according to the Fitch report.
The negative rating watch reflects the city’s comments that it might choose to violate its covenant to budget and appropriate in fiscal 2013 for the full lease revenue bond debt-service payment due Aug. 1, analysts said. The covenant applies to all legally available funds; however, the city has cooperative agreements with its water and sewer funds and redevelopment agency to pay debt service, the report said.
While the city of 113,475 is not a large issuer of bonds — Morales said they might only issue debt once every two years — they are concerned about their bond rating.
But they also don’t want to loan money to the redevelopment agency to shore up its short-term cash-flow problem and then have the state fail to pay the city back, he said.
According to the city finance director, El Monte is not alone in dealing with this problem.
“I’m sure we are not the only ones who have received ratings downgrades based on this issue,” Morales said.
The way the legislation is set up Los Angeles County will distribute money to successor agencies in six-month increments.
Cities, who formerly would loan their redevelopment agencies, are now reluctant to do so, because they don’t know if they will get the money back from the state, Morales said.
“The county gave us $1 million less than they should have this year,” Morales said. “So they were paying until February and then the spigot got cut off.”
The oversight committees set up to oversee the RDAs are just now starting to meet with successor agencies to hammer out how everything will work.
“We just met with our oversight committee last week,” Morales said.
The city notified Fitch that its redevelopment agency might have short-term cash flow problems.
Before the state’s dissolution, cities frequently loaned money to their RDAs when they experienced cash shortfalls. El Monte is not alone in being reluctant to loan dissolving agencies money they may never see again.
The city’s financial operations appear to be satisfactory based on audited information for fiscal 2010 and prior years, and unaudited information for fiscal 2011, analysts said.
“However, the downgrade further reflects Fitch’s concerns about the timeliness and transparency of financial information,” analysts said. “If these concerns are not addressed, Fitch will not be able to continue to maintain its rating on the city’s debt.”
