LOS ANGELES — Compton, Calif., after talk of potential bankruptcy last year, on Tuesday sold a $5 million tax revenue anticipation note to Wells Capital, a division of Wells Fargo Bank.
Despite the city’s success in selling the note, information included in the preliminary offering statement indicates the city still has a long way to go to reach financial stability.
IFS Securities, the city’s investment banker, said several buyers were interested in purchasing the city’s unrated note. It was offered only to accredited investors “sophisticated and experienced” in purchasing TRANs, according to the preliminary offering statement posted on the Municipal Securities Rulemaking Board’s EMMA website. The city didn’t seek a rating for the note, slated to close Thursday.
The notes will be repaid through a lockbox mechanism in which a portion of the property and sales tax allocations collected by the county for Compton will be handed over directly to bondholders.
“The city manager’s recovery plan and the positive action taken since his arrival late August was a key factor in obtaining the order for the whole note issue from Wells Fargo,” said Craig Walker, an IFS Securities vice president.
The California Public Employees’ Retirement System dropped the lawsuit it filed against the city in October for missed pension payments after the city brought its payments current, said City Manager Harold Duffey.
“I think we are moving in the right direction,” Duffey said in a release.
Both Moody’s Investors Service and Standard & Poor’s withdrew ratings last year citing a lack of audited financials.
Duffey said the city has hired a new auditor to resolve that issue.
The city has been experiencing cash-flow problems since 2008. The city’s 2012-13 budget has an anticipated deficit of $9.1 million if measures including negotiations with employees are unsuccessful.
Compton’s plans to issue short-term debt early last year were squashed after Mayor Eric Perrodin sent a letter to California Controller John Chiang in December 2011 requesting a forensic audit of the city and suggesting that the general fund deficit was caused by “possible fraud, waste and or abuse of city monies.”
Then in June, the city’s former audit firm, Mayer Hoffman, McCann refused to sign off on its financial statements and quit citing the allegations made by Perrodin. The auditor also cited “substantial doubt in the city’s ability to continue as an ongoing concern.”
Duffey said in November the city had hired Sacramento-based Macias, Gini & O’Connell for its audit. Financial documents in the preliminary offering statement state that the city still has not developed a timeline outlining when the city expects to obtain audited financial statements for fiscal year 2011 or 2012.
While Duffey said in the preliminary offering statement that the city is not planning to file for bankruptcy, the POS adds that “no assurance can be made that the city will not file for bankruptcy protection before the maturity date of the notes.”
On a positive note, the city has approved and is currently seeking shared commitments with its bargaining units and other cutbacks to manage cash flow that it hopes will enable it to reduce its projected fiscal deficit for 2013 to $1.9 million.
Duffey contends, according to financial documents, that the liquidity issues faced by Compton are different from the long-term financial problems of other California cities that have filed for bankruptcy.