Standard & Poor’s gave Fullerton a negative outlook largely based on California’s rejection of its recognized obligation payment schedule for the city’s role as successor agency to its former redevelopment agency.
California cities could elect to become the successor agency to their RDAs after legislation dissolving the agencies went into effect early this year.
S&P also lowered the city’s long-term rating to AA-minus from AA and assigned a negative outlook to lease revenue bonds issued by the Fullerton Public Financing Authority based on reduced reserve levels.
Standard & Poor’s also lowered its long-term and underlying ratings to AA-minus from AA on Fullerton Redevelopment Agency certificates of participation and the city’s previously issued revenue bonds.
“The negative outlook reflects what we view as the city’s exposure to previously state-rejected redevelopment projects which, if not approved, could affect Fullerton’s credit fundamentals in the future,” analysts said in the report. “In addition, city officials estimate some continued structural imbalance in the general fund, despite some previous budget reductions to offset historical revenue declines.”
A portion of the disputed bond proceeds has not been spent, but $22 million was used to build the city’s community center.
The state rejected that as a valid redevelopment project because the city, as opposed to its redevelopment agency, had signed the contracts with the developer as was the city’s practice pre-dissolution, according to the report.
The city has resubmitted its request to the state Department of Finance, but if it rejected again, the city could be on the hook for $19 million.
However, city officials told analysts that it could use general fund, other fund reserves or issue debt to recover the funds.
Analysts credited Fullerton for continuing to budget appropriate amounts in the general fund to fund both its Series 2010A bonds, which were backed by federal subsidies that now may not be available, and on the COPs issued for the RDA.
The 2010A debt was issued as federally taxable recovery zone economic development bonds. The city has budgeted for the full cost of payments on the bonds regardless of whether it receives the federal subsidy.
