LOS ANGELES - Bonds issued by Huntington Park, Calif.’s now-defunct redevelopment agency, and the city’s pension obligation bonds, took a ratings hit Thursday after the city used a reserve surety to make a Sept. 1 debt-service payment.
Standard & Poor’s lowered its ratings on the $55.8 million refunding revenue bond issued by the east Los Angeles-area city’s redevelopment agency to BBB-plus from A and assigned a negative outlook following a $212,292 draw on the reserve fund from Assured Guaranty Corp. to make a debt service payment. Analysts said the drawdown used about 4% of the fund. The remaining balance in the reserve account was $5.19 million following the draw, according to a filing on the Municipal Securities Rulemaking Board’s EMMA disclosure website.
The city “failed to set aside sufficient annual pledged revenue to meet annual debt service on underlying 1994 tax allocation bonds pursuant to the fiscal agent agreement and after the passage of Assembly Bill 1484, which disrupted agency cash flow,” said Standard & Poor’s credit analyst Sussan Corson.
In addition, the city failed to budget and appropriate from its general fund for a portion of annual debt service, as required under the associated 2004 lease agreement between the city and the authority, Corson said.
The rating agency also lowered its ratings on the city’s pension obligation bonds to A-minus from A-plus based on the reserve account draw, according to its report.
“The downgrade is due to past actions and general uncertainty regarding how RDA financing is being done,” said Julio Morales, who officially begins duties as the city’s finance director on Monday. He continues to serve as nearby El Monte’s finance director through the end of the week.
That has been a fairly consistent pattern with the RDA bonds that have been downgraded wholesale since the state legislation dissolving the redevelopment agencies went into effect early this year, Morales said.
“The state assumed that debt payments made the first part of the year would be the same, they did not take into account that cities might have payments of unequal amounts on bonds throughout the year,” Morales said. “It has caused a number of cities to miss debt service payments and use debt surety. The same thing happened to us in El Monte.”
S&P, however, attributed the rating downgrade to the city’s failure to account for uneven semi-annual debt service requirements on its previous recognized obligation payment schedule.
Huntington Park already has repaid the surety and plans to dedicate money from its general fund to make future payments, he said.
City officials are also making other budgetary changes and plan to report back to the rating agencies with changes within 90 days, Morales said.
Analysts said the negative outlook reflects their view of the current shortfall in the debt service reserve surety and potential disagreements with Los Angeles County about subordination of county-deferred pass through payments under a 1990 tax-sharing agreement. In the report, analysts also said the presence of variable-rate tax allocation notes exposes the successor agency to renewal risk.
S&P downgraded the city’s POBs based on analysts’ “view of the city’s management after it failed to budget and appropriate any lease payments” for the RDA bonds causing the reserve draw, Corson said.
Analysts further raised concerns that the city could be exposed to litigation from Assured based on the reserve draw.
According to a lease agreement, analysts said, the city covenanted to budget and appropriate from its general fund up to $1.18 million for the bonds.
“By not budgeting and appropriating from the general fund to meet lease payments after pledged property tax increment cash was insufficient, we believe the city could have violated lease agreement and trust indenture covenants,” according to the report.