SAN FRANCISCO — Montebello, Calif., has won a legal victory that will allow it to sell notes to buffer its troubled finances.

A Superior Court last week dismissed a lawsuit against Montebello and its redevelopment agency filed by local businessman Ara Sevacherian stemming from $16.8 million of tax and revenue anticipation notes issued by the city in 2010 and sold to the agency. 

He challenged the RDA-to-city loan but the court dismissed the case because the loan had already been repaid when it matured in June, according to a statement from the city.

Montebello now plans to issue $3.9 million in short-term notes later this month to help manage cash flow. City officials say the upcoming note sale marks a turning point.

“Montebello is turning the corner. The press has been much more negative than justified. This isn’t Bell,” said interim city administrator Larry Kosmont, referring to the woes of another troubled California city.

Former city administrator Peter Cosentini said in April that by this fall, the city could go bankrupt without a bridge loan — the note issue — and massive cuts.

Kosmont said the upcoming note sale, will be a private placement and he expects rates likely in a range of 2.25% to 3.50%.

Montebello has around $126 million of outstanding bond debt.

The city hired De La Rosa & Co. in July to sell the short-term notes this month. That move came after it hired Kosmont, president of Kosmont Cos., a development services firm with a focus on real estate and public finance, in May to help turn around its finances. It also hired First Southwest Co. as its financial advisor.

Moody’s Investors Service downgraded Montebello to Baa2 from A3 in May because of weak cash flow, depleted reserves, and ongoing budget problems. The rating agency also downgraded $14.5 million of certificates of participation to junk-grade Ba1 from Baa2.

At the time, Moody’s said the repayment of the redevelopment agency loan and restoring liquidity were major hurdles for the city. The rating agency did not respond to a call for comment on recent developments.

In an effort to cope with budget deficits, the city made cuts, got employees to pay more for pensions, raised fees, extended an oil levy, and will add a new Costco fuel center.

“The city’s past practice of shifting restricted funds to balance the bottom line of the general fund account has stopped,” Montebello Mayor Art Barajas said in a statement Tuesday. “New auditors have reviewed the city’s books and resolved many of the poor past practices of prior city administrators, finance directors and City Council members.”

In April, California Controller John Chiang sent a letter to city officials notifying them his office would audit Montebello’s finances, citing concerns about two “off-the-books” bank accounts, the use of $15 million of redevelopment funds to pay restricted fund loans, and the use of U.S. Department of Housing and Urban Development funding.

Shortly after the controller’s letter, HUD told the city it must pay back $2.7 million on top of $2.2 million already owed to the federal agency. HUD also froze Montebello’s access to affordable housing funds, citing 31 violations.

Kosmont said the controller’s office has finished its audit and provided draft findings to the city that indicated “no surprises.”

Barajas said claims of payments from the unknown bank accounts to developers have been proven false and resolved.

The city said HUD’s recent audit and a related FBI investigation, focusing on the use of the federal housing money in 2009, resulted in a payment plan by the city supported by HUD. Montebello said it has repaid nearly one-third of what it owes HUD and will pay off this year’s required payment by the end of September.

 “It really is just a community that has needed to reorganize their finances, tighten its belt during a recession and put some better practices in place,” Kosmont said. “Going forward, if they keep it up they should be in pretty good shape.”

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