California’s Hercules Downgraded as Redevelopment Agencies Die

Hercules, California, had the debt of the city’s redevelopment arm lowered five levels, one day after the state dissolved it and more than 400 other such agencies.

Standard & Poor’s cut its rating yesterday on the Hercules Redevelopment Agency’s housing tax allocation bonds to B, the fifth-lowest non-investment grade, from BBB-, the lowest investment grade. S&P didn’t give a value for the bonds affected.

Redevelopment agencies helped finance projects intended to overcome blight, and received property-tax revenue increases that resulted, known as the tax increment. Those funds were insufficient to cover Hercules’s housing- and non-housing tax-allocation bonds, and property taxes coming later this year probably won’t cover an Aug. 1 debt payment, S&P said.

“The downgrade reflects our assessment of the agency’s use of the Ambac Assurance Corp. surety reserve to fund a $2.4 million debt service payment on Feb. 1,” credit analyst Sussan Corson said in the report. “The outlook remains negative reflecting our expectation that pledged revenue will remain insufficient to cover non-housing debt service obligations and remaining surety reserve funds could be depleted in the next one to two years.”

California dissolved its redevelopment agencies effective Feb. 1 in an effort by Governor Jerry Brown to direct more than $1 billion of their funds to education, roads and fire departments, to fill a state budget gap.

Hercules is a city of 24,000 located about 25 miles (40 kilometers) northeast of San Francisco.

Couldn’t Make Payment

City Manager Steve Duran said the redevelopment agency couldn’t make its payment and the insurer did. The city is in court with Ambac over whether $4.2 million in December tax collections kept by the redevelopment agency should have been used to make bond payments, he said.

While the two are in negotiations, Hercules may have to seek bankruptcy protection if it loses in court, he said.

“We’re pretty sure we’ll be able to reach an agreement,” Duran said in a telephone interview.

Michael Fitzgerald, a spokesman for Ambac, didn’t immediately reply to a request for comment on the dispute after business hours.

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