Moody’s Cuts $11.6 Billion California Redevelopment Debt

Tax-allocation debt tied to California’s former redevelopment agencies was cut to junk by Moody’s Investors Service, which cited the uncertainty of cash flow to make payments on $11.6 billion in bonds.

All the securities rated Baa3 or above were downgraded to Ba1, one step below investment grade, and are under review for a ratings withdrawal, analysts Eric Hoffmann and Kevork Khrimian said yesterday in a report.

Redevelopment agencies issued bonds to finance projects and received property-tax revenue increases that resulted. Governor Jerry Brown and lawmakers eliminated the agencies Feb. 1 and directed their assets toward public education. Cities and counties assumed responsibility for most redevelopment debt.

“The downgrade is wholly unwarranted,” Tom Dresslar, a spokesman for California Treasurer Bill Lockyer, said yesterday. “No bondholder has failed to receive payment as a result of the dissolution of redevelopment agencies. The law makes it very clear that bondholders have the same priority for payment after the dissolution as they did before.”

The legislation that dissolved the agencies left the potential for legal and political disputes over the procedures for distributing revenue, Moody’s said.

A quarrel in Santa Clara County was cited June 8 when Moody’s cut the ratings on $1.75 billion in tax-allocation bonds issued by the former redevelopment agency in San Jose, California’s third-largest city.

San Jose Dispute

The county, which collects and distributes property taxes to its municipalities, withheld $20 million from San Jose. The county said its largest city failed to provide financial information for repaying bondholders, according to a statement.

In its report today, Moody’s said debt service on redevelopment bonds could be disrupted even in fiscally healthy cities and counties because of ambiguities in the law.

“The new cash distribution procedure effectively eliminates bond indentures’ flow of funds, and it is clearly subject to differing procedural interpretations,” the report said. “These differing interpretations can, without warning, give rise to the potential for debt-service defaults that did not exist prior to the passage of this law.”

Pico Rivera and Monrovia missed payments on debt from their former redevelopment agencies, officials in the two Los Angeles County suburbs have said.

To contact the reporter on this story: James Nash in Sacramento at jnash24@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net