MENLO PARK, Calif. — The Reno City Council meets next week to discuss how the Nevada city can avoid defaulting on bonds backed by a lease with a defunct casino.

Reno leased city-owned land to Fitzgeralds Casino & Hotel, which closed its doors in 2008, for construction of a casino parking structure.

Because the current lessee has not made a payment in a year, Reno is negotiating with the bank that owns the bonds. It leveraged the lease revenues by privately placing $6.1 million of variable-rate revenue bonds in 2007 with Depfa Bank.

“Technically, we are in default because [the bonds require we] have that revenue coming in,” said Kevin Knutson, the city’s director of budget and strategic planning. Reno has a forbearance agreement with Depfa to try and find a solution to avoid default, which expires Sept. 16.

“We have the money to make the payments for a very long time,” Knutson said.

The City Council recently agreed to consider making funds available to replenish the reserve fund created for the lease bonds and meets Sept. 8 to discuss the issue. However, officials claim the council is not required to make the appropriations.

Standard & Poor’s last week put Reno’s general obligation rating of A on negative CreditWatch. Moody’s Investors Service affirmed its Aa2 rating and negative outlook Tuesday.

“The CreditWatch action reflects our view of the potential strain on the city’s general fund related to [its] previously issued series of taxable Fitzgeralds lease revenue bonds,” said Standard & Poor’s analyst Bryan Moore.

Management said it believes the current forbearance agreement is likely to expire without any restructuring of the lease bonds, according to Moore.

Knutson said management statements were mischaracterized in the Standard & Poor’s report. If the forbearance agreement is not extended, the bank may declare the outstanding principal due immediately. But payment can only be made from funds tied to the bonds, according to Moody’s.

The city has $480,000 in a reserve fund for the bonds and a reserve fund of $775,000 on deposit with Depfa.

Moody’s said Tuesday in a report that the distressed bonds pose “manageable additional credit risks.” It said appropriations by the City Council, if needed, represent an affordable obligation given the relative small size of the deal.

Falling revenues have placed “egregious pressure” on Reno as tax collections have faltered, Knutson said. Revenues from property taxes, sales taxes and other economically sensitive revenues have been sliding the past two years and the city has cut back on services and reduced staffing levels to balance the budget.

Yesterday, Reno competitively sold $21.1 million of general obligation limited tax sewer refunding bonds. Robert W. Baird & Co. won the bonds with a true interest cost of 3.9981%, according to Thomson Reuters.

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