SAN FRANCISCO — Hercules, Calif., has warned investors it may not be able to service debt issued for its municipal utility.

The city has put up for sale its unprofitable Hercules Municipal Utility, which has been unable to produce enough revenue to cover debt service on more than $13 million in par of revenue bonds the Hercules Public Financing Authority issued in 2010.

Hercules said in a disclosure filing to the Municipal Securities Rulemaking Board’s EMMA website that its bond counsel has advised the city that it may be required to defease all or part of the bonds in order to keep them tax-exempt if it sells the utility.

But even the sale may not be enough to cover the full redemption of the bonds, according to city manager Steve Duran, who said in the filing that “no assurance can be provided that the sale of the [Hercules Municipal Utility] will occur or that the amount of proceeds derived from the sale of HMU will result in amount sufficient to defease all the bonds.”

The electric utility already doesn’t make enough to pay debt service, using unspent bond proceeds to fill in the gap, and city officials estimated the sale could take at least eight months, according to the filing.

In August, Hercules used $745,000 of bond proceeds to pay debt service, leaving $4.5 million. It plans to use $800,000 of the bond money for capital projects this fiscal year, leaving the rest as a buffer for debt service until the utility is sold.

Though the city agreed to make general fund advances to support debt service on the revenue bonds, in the EMMA filing it said it “does not anticipate that there will be any available funds to make such advances in the foreseeable future and does not expect to make any such advances.”

The sale of the utility is part of the city’s plan to right its finances.

Hercules, located northeast of San Francisco with a population of around 26,000, has been battered by self-inflicted financial problems.

Two recent audit reports released earlier this year by the state controller slammed the city’s and its redevelopment agency’s spending, record keeping and use of bond money. Last year, a Contra Costa County grand jury said in a report that Hercules used bond funding to make up a $6.6 million deficit.

The allegations of fiscal improprieties led the Federal Bureau of Investigation to open a probe.

The city now has mostly new officials who replaced those who oversaw the alleged abuses, and the new team says it recognizes many of the problems and is trying to correct them.

The city also got a boost in June when voters overwhelmingly approved a half-cent sales tax increase for four years to add as much as $500,000 revenue annually to the city’s budget.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.