Standard & Poor's Ratings Services said it lowered its rating on the city of Huntington Park, Calif.'s pension obligation bonds to A-minus from A-plus.
The outlook is negative.
"The downgrade on the POBs reflects our view of the city's management after it failed to budget and appropriate any lease payments, as covenanted, for Huntington Park Public Financing Authority's series 2004A revenue refunding bond debt service causing a recent draw on the surety reserve for those bonds," said Standard & Poor's credit analyst Sussan Corson.
According to a lease agreement between Huntington Park Public Financing Authority's and the city, the city covenanted to budget and appropriate from its general fund up to $1.18 million for series 2004A authority revenue bonds.
Also according to the lease agreement, if the trustee holds sufficient tax increment revenues to meet debt service payments at least five days before a lease payment date, no lease payment will be due; however, the successor agency to the redevelopment agency (RDA) drew on a surety reserve in September 2012 after it had insufficient property tax increment revenue to meet debt service and the city made no lease payment toward the bonds.
The rating reflects Huntington Park's: high unemployment rates despite a convenient, centralized location within the greater Los Angeles County metropolitan statistical area; adequate-to-low income levels; high debt service carrying charges and slow amortization; and recent management turnover that has led to confusion related to debt service payment on the series 2004A debt.
The weaknesses are somewhat mitigated by the city's very strong unassigned general fund and other available fund balances.
The negative outlook reflects that Huntington Park could be exposed to litigation under the indenture and lease agreement if it fails to remedy the reserve draw. By not budgeting and appropriating from the general fund to meet lease payments after pledged property tax increment cash was insufficient, the city could have violated lease agreement and trust indenture covenants.
City officials report the failure to appropriate was due to a transition in management and confusion related to the dissolution of RDAs in the state. City officials intend to replenish the surety in full from Huntington Park's general fund in the next few weeks.
The indenture requires the trustee to provide written notice of a covenant default. The trustee has not given any such notice to date. Should the city or successor agency receive such a notice exposing them to litigation, S&P could lower the rating further.
Huntington Park (population approximately 61,300), encompasses just three square miles and is in Los Angeles County, five miles south of downtown Los Angeles.
S&P said it also lowered its underlying rating to BBB-plus from A on Huntington Park Public Financing Authority, Calif.'s series 2004A revenue refunding bonds, issued on behalf of the Huntington Park Community Development Commission (CDC) for the merged redevelopment project area. The outlook is negative.
"We base the downgrade on the successor agency's draw on the series 2004A bonds' surety reserve after it failed to set aside sufficient annual pledged revenue to first 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.