SAN FRANCISCO - Standard & Poor's rated Half Moon Bay, Calif.'s judgment obligation bond issue AA-minus, saying strong financial management and high wealth levels offset the weight of a looming settlement payment.

The $16.7 million issue, which the city expects to price in June, would help pay off an $18 million debt it owes to a developer. Half Moon Bay was ordered to pay $41.1 million in 2007, but it negotiated the debt down to $18 million last year.

The government has since cut its $11.6 million general fund budget sharply to free up about $1 million for debt service.

The judgment obligation bonds "will fully address the liability created by the adverse judgment on the city," Standard & Poor's analyst Chris Morgan said in a report. "The rating reflects our belief that budget amendments in February and March 2009 will allow the city to address both the additional carrying charges and the downturn in tax revenues associated with the recession."

The AA-minus rating and the city's promise to pay off the debt is a far cry from the talk of bankruptcy that followed the judge's ruling against Half Moon Bay. Officials said the $41.1 million judgment "could have bankrupted" the government in an April 2008 news release announcing the $18 million settlement, and the mayor told the local newspaper that the city had considered bankruptcy.

But officials in the beach community 30 miles south of San Francisco are trying to put an end to such talk.

"The city has never endorsed or authorized any legal steps in preparation for bankruptcy," said city manager Michael Dolder. "The city has no intent of filing bankruptcy."

Half Moon Bay has entered into an "absolute and unconditional pledge to make debt service payments from any available funds," said Standard & Poor's.

The deal - which could still be reduced in size if local lawmakers are able to secure state aid to pay some or all of the settlement - is to be underwritten by Piper Jaffray & Co. The city has judicial approval to sell $18 million of judgment obligation bonds, but it plans to use reserves to pay part of the settlement.

Standard & Poor's said Half Moon Bay has a "record of maintaining very strong available general fund balances" and has "demonstrated willingness to make significant budget adjustments to achieve structural balance in the context of the current recession."

As of June 30, 2008, the city had an unreserved general fund balance of $7.3 million. Its proposed 2009-10 budget would include an unreserved, undesignated fund balance of $6.7 million.

The city also benefits from "favorable" wealth and income levels, Standard & Poor's said. Analysts said median household effective-buying income was 168% of the national average.

The main credit quality constraint on the city is its reliance on volatile transient occupancy taxes, Standard & Poor's said. Such hotel taxes make up about a third of the city's general fund revenues. The city is home to several resorts, including the Ritz-Carlton Half Moon Bay.

Given such resources, the city wouldn't be eligible for bankruptcy, according to John Knox, a lawyer at Orrick, Herrington & Sutcliffe, the city's bond counsel and an expert on restructuring distressed finances.

"Our advice to the city would be that it would not be eligible to file such an action even if it wanted to," Knox said, trying to put bankruptcy talk to rest once and for all.

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