A major bond rating agency downgraded a significant segment of California bonds due to the recent court decision that dissolves redevelopment agencies statewide as of Feb. 1.
Moody’s Investor Service gave California redevelopment or tax allocation bonds by one step. The action applies to all redevelopment bonds currently rated Baa2 and above, and Moody’s said all of the state’s redevelopment bonds would remain on review for a possible downgrade, according to a press release from Moody’s.
The decision could result in higher interest rates on the bonds that are affected by the downgrade.
The city of Morgan Hill, which issued $110 million in redevelopment bonds in 2008, will not be immediately affected by Moody’s decision, primarily because the service does not rate the local bonds, city finance director Kevin Riper said. Standard & Poor’s is the designated rating agency for Morgan Hill’s bonds.
The local bonds, Riper added, are at an “all-time low interest rate” of .04 percent, or four basis points.
Moody’s said it lowered the redevelopment bonds’ rating due to the Dec. 29, 2011 state Supreme Court decision that eliminated redevelopment agencies. Because of that decision, cities and counties all over the state are in the process of freezing their redevelopment-related revenues and liquidating other assets in order to ensure their bond payments remain on schedule.
Last year, the city of Morgan Hill paid about $3 million in interest and principal on taxable and tax-exempt bonds, Riper said. Most of that payment – about $2.7 million – was for the principal amount.
The city’s RDA acquired the bonds in February 2008. About $96 million worth of the bonds are tax-exempt, and about $13.8 million are taxable, according to Riper.
It is unknown how the Supreme Court decision, which upheld a state law approved last year that also spells out the redevelopment dissolution process, could affect annual bond payments made by cities that currently have RDAs.
The state law, passed as part of the governor’s budget for the current fiscal year, establishes property tax allocations that conflict with the original bond documents, according to Moody’s press release. The timely schedule of this reallocation and repayment of the bonds is now less certain because of the state law.
Plus, the restructuring process could result in “mismatched receipt and disbursement schedules” over the next year, also potentially complicating repayment efforts, Moody’s said.
On top of that, the new law’s “sheer complexity” adds another layer of uncertainty to the bonds, according to Moody’s.
