Oakdale, Calif., officials are scrambling to restructure debt and planning to raise sewer rates after the city missed an Aug. 31 debt service payment on an unrated state revolving fund loan secured on a parity basis with the city’s 2002 sewer revenue bonds.

The payment default resulted Moody’s Investors Service Friday downgrading to B1 from Baa1 the city’s 2002 sewer enterprise bonds. The downgrade to speculative grade was the rating agency’s second on the bonds over the past several months. Moody’s downgraded Oakdale’s bonds in May to Baa1. from A3

City officials have been negotiating with officials who oversee California’s clean water state revolving fund program about Oakdale’s missed $844,000 payment, said Stanley Feathers, the interim city manager.

“When we identified the issues, we contacted staff at the SRF and requested they work with us on a number of strategies to deal with this problem,” Feathers said. “The city fully intends to meet its long term obligations.”

At the state agency’s request, the city made the $325,000 interest payment on the loan, but still owes the $520,000 principal payment, Feathers said.

Oakdale has experienced turnover of top city staff over the past several years as it eliminated some positions, combined others and outsourced city tasks in an effort to deal with fiscal pressures. Since last summer, the city has seen turnover in the positions of city manager, public works director, assistant public works director, fire chief and police chief.

That, Feathers said, partly explains what he called the “miscommunication” that occurred when the city’s public works department told financial administrative services that the first payment on the loan was not due until August 2013, Feathers said.

City staffers didn’t realize the error until they received the $844,000 bill from the state water board in July, according to a disclosure filing on the Municipal Securities Rulemaking Board’s EMMA website.

The city issued $2.6 million of bonds, of which $1.6 million is outstanding, on March 28, 2002, and received the $13.2 million state loan on Oct. 15, 2009, but was not required to make payments on the revolving loan fund until the project was completed. The upgrade to the wastewater system funded by the bond and loan, to meet updated wastewater permit requirements, was completed in February.

The city also failed to fund the financing agreement reserve requirement of $844,408.67.

Oakdale is up to date on bond payments and has budgeted for and intends to make its full debt service payments of $210,243 for fiscal 2013 on the 2002 bonds, according to a disclosure filing on EMMA. The bonds are insured by National Public Finance Guarantee Corp.

The city has asked the state water board if it can postpone the debt service for one year on the revolving loan, build up the reserve over a 10-year period, and restructure the 20-year debt to a 25- to 30-year time frame “so it won’t result in rate shock for the taxpayers,” Feathers said.

The city just implemented a three-year 10% rate increase in July 2009, but it has not brought in the expected income. It has hired consultants to conduct another rate study by first quarter 2012 to guide the city in a future rate increase, Feathers said.

The city and state agency have not reached an agreement on terms, but Feathers said city officials are hopeful an agreement can be reached over the next couple of months.

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