SAN FRANCISCO — Some California redevelopment agency bonds with poor backstops will face credit stress if legislation to disband the agencies or force large payouts is upheld in court, according to Standard & Poor’s.
The rating agency said in a report Monday that 16 RDA ratings, placed on negative credit watch earlier this month, are particularly at risk.
The troubling characteristics cited by S&P’s include lack of adequate maximum annual debt service coverage or liquidity, and large principal payments in the near term.
Standard & Poor’s said many of these bonds will come under more financial strain because they will likely lose the ability to use funds outside of pledged revenues and reserves to cover shortfalls.
Larger tax-allocation bond issues affected by that credit watch include those of the Contra Costa County Public Financing Authority and the Stockton Public Financing Authority.
“We believe [redevelopment] agencies will likely have access only to pledged money, primarily debt service reserves, to cover shortfalls,” Standard & Poor’s analyst Sussan Corson said in the report. “If upheld, we believe the new legislation is likely to accelerate the credit deterioration of these bonds.”
Most California tax-allocation bonds that it rates retain stable outlooks.
The state’s 400 redevelopment agencies are facing two new laws that force them to either hand over an estimated $2.1 billion over the next two years to help the state balance its budget or else be eliminated.
The state Supreme Court has stayed most parts of the new legislation until it comes to a decision on agencies’ legal challenge to the laws, which is expected by mid-January. In the meantime, RDAs are blocked from entering into new financing agreements.
If the laws stand, Standard & Poor’s said it expects future legislation to fix many of the financing problems related to redevelopment agency bonds. But the short-term impact posses risk to RDAs already under stress.
Falling property assessments have reduced many agencies’ tax increment which they use to cover debt service. As a result, the RDAs have used other funds, such as intergovernmental loans and tax increment from other projects, to cover debt service rather than dipping into reserves.
The new legislation requires the RDAs to give up all unpledged funds and proceeds from the liquidation of assets. It also restricts the repayment of intergovernmental loans, which have been used by some city’s to cover redevelopment agency obligations.
The report also noted the risk the legislation poses to San Jose’s and Rocklin’s redevelopment agencies, which have also been put on watch for a possible downgrade because both face expiring credit facilities that they can’t roll over while the lawsuit is pending.
Standard & Poor’s said the bonds are at risk of non-payment.
The language in the legislation blocks the agencies from issuing any new debt after Oct. 1, even to cover spikes in debt service, unless an oversight board has been created for the undertaking, the report said. However, the court has stayed the part of the law that allows for the creation of the boards.
In the long term, Standard & Poor’s said legislative fixes would likely cure the agencies’ financing problems, if the legislation is upheld.
“We do not expect either piece of legislation to affect overall credit quality for the majority of the bonds we rate that have good coverage of existing debt service by pledged revenues and pledge reserves,” Corson said.