SAN FRANCISCO — Stockton, Calif., is facing the rising specter of a technical default on its redevelopment agency debt, as it will likely have to dip into reserves to pay debt service for $87 million of outstanding bonds.

The Stockton Redevelopment Agency expects to be $856,000 short of tax-increment revenue in one of its project areas to cover upcoming debt service on two series of outstanding revenue bonds totaling $74 million issued in 2006, according to a filing this month with the Municipal Securities Rulemaking Board.

The RDA will cover debt service with reserves, the filing said.

The agency made its Sept. 12 interest and principal payment on the revenue bonds. The next payment for interest is due on March 1.

The main cause of the revenue shortage is a falloff in tax-increment revenue because of a dip in property values. The city is anticipating a decline of more than 3% in assessed values within the agency’s area for fiscal 2012.

The RDA reports having more than $11 million in unspent bond proceeds, but its ability to use those funds to address the tax shortfall is constrained by the bond documents and the unsettled legal situation of all California redevelopment agencies, according to the disclosure.

The trustee has said it will not use unspent bond proceeds for debt service unless reserves are exhausted, according to the disclosure document.

The city would like to use unspent proceeds to redeem or repurchase bonds, but is currently unable to do so because redevelopment activities around the state are frozen because of an unsettled lawsuit before the California Supreme Court.

State redevelopment agencies are challenging a new law that forces them to choose between making large payments to the state or dissolution. The lawsuit has kept the RDAs from being able to enter into new financing agreements.

Oral arguments are scheduled Nov. 10 with a decision expected by mid-January.

Unless the law is struck down, Stockton officials said their RDA may have to shut down because they may be unable to afford the more than $8 million payment.

The city also anticipates it will fall $752,000 behind on tax revenues for debt service payments on around $13 million of outstanding certificates of participation sold in 2003.

The payments, made from tax-increment revenue that has been set aside for low-income housing, are subordinate to the third series of 2006 revenue bonds, which the city expects to be able to cover.

Stockton chief financial officer Susan Mayer said in the disclosure filing the Redevelopment Agency will have to dip into reserve funds to cover the shortfall from the first two series of revenue bonds issued by the Stockton Public Financing Authority.

City officials did not return a call for comment.

The RDA’s Series A 2006 revenue bonds traded at a price of 87.52% of par and a yield of 6.31% on Monday in a lot of 25,000, according to MSRB secondary trading data. The agency is still trying to figure out how to cover the debt service hole for the COPs, which are backstopped by the general fund, according to disclosure.

The burst housing bubble crushed Stockton, a city of around 300,000 located 80 miles east of San Francisco that lead the nation in foreclosures for a time. The city’s assessed property values dropped 19% in fiscal 2010 and then 5% in fiscal 2011.

As of August, Stockton’s unemployment rate was 16.1%.

The city had $702 million of outstanding bond debt — $374 million related to governmental activities and $327 million tied to business-type activities, according to its comprehensive annual financial report for the fiscal year ended June 30, 2010.

The Redevelopment Agency also has $46 million of outstanding revenue bonds issued in 2004 to help pay for an arena. Revenue from the arena’s redevelopment project area appears adequate to cover debt service, according to the city.

City officials expect that between $2.6 million and $6.2 million will have to be transferred from the general fund to cover the agency’s negative cash fund balance. Additionally, the city expects to add another $1 million to cover its operating costs.

The extra costs have yet to be factored into the general fund budget, which is already facing a $4 million deficit for its fiscal 2012 budget. Last year, Stockton tackled a $37 million deficit in a budget with $160 million of revenues. The city declared a fiscal emergency twice in as many years.

Earlier this month, Standard & Poor’s downgraded the underlying rating to B from BB on the Public Finance Authority’s Series A and B revenue bonds issued for the Stockton RDA.

The rating agency dropped the long-term rating on the bonds, which are supported by Radian Asset Assurance Inc., to BB-minus from BB.

It also downgraded the underlying rating on the Series C 2006 bonds to BBB-minus from BBB. The outlook on both ratings is negative.

Standard & Poor’s said in the Oct. 4 report that the reserve funds for the bonds are primarily invested in guaranteed contracts with Societe Generale and American International Group.

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