business

California City Sheds Sordid Past With Pledges and Juicy Yields

  • Bell has overhauled practices after corruption scandal
  • City’s general-obligation bonds may come at higher yields

Bell, California, is banking on the faith -- and hunger-- of municipal-bond investors to move past its reputation as an exemplar of graft and corruption.

The 36,000-resident city southeast of Los Angeles on Wednesday is selling about $26 million in general-obligation bonds to refund older securities, its first sale since a 2010 Los Angeles Times investigation revealed that officials of the impoverished town were among the highest paid in the country. The city manager earned nearly $800,000.

Under new leadership after a flurry of criminal charges against former leaders, Bell has overhauled its financial practices. A lack of controls, which allowed a former top official to raid city funds for his own devices, has "been remedied," said Jesse Brady, a vice president at Belle Haven Investments, which may buy the bonds.

“The fraud and the scandal are behind them,” Brady said. “There is meaningful upside to the credit.”

Bell is coming at a good moment to gauge the market’s capacity for forgiveness. With money continuing to flow into bond funds and with subdued sales of new debt, fund managers are under pressure to buy securities, especially those that offer higher yields. Bell’s bonds, which carry an underlying issuer rating of BBB+, three steps above junk, from S&P Global Ratings, will likely come cheap given its sordid history, which includes misuse of bond proceeds and a default.

"Safest Place"

Preliminary price talk Tuesday has a 10-year, tax-free bond yielding 3.01 percent, well over the 2.54 percent yield on benchmark debt even though it carries insurance from Build America Mutual.

For Bell, the bond sale could test the progress the city has made. Given the level of scrutiny Bell is under, the city is "probably the safest place in the county right now," said David Brodsly, a managing director at KNN Public Finance, the city’s financial adviser. "If there ever is a time to buy Bell, this has to be it.”

The scandal resulted from the former chief city administrator having "complete control and discretion" over taxpayer money, and there was no proper oversight given that the official boosted the compensation for most of the council members, offering documents said. The former administrator even funneled bond proceeds improperly into the general fund, which resulted in a higher cash position and thus justifying an increase in his own salary under his employment agreement.

Bell, which is now run by different managers and council members, has implemented recommendations from the state controller, such as setting up internal controls to prevent misuse of funds. The city website shows the salaries of the employees and public officials. Bell ended last year with a 4 percent general fund surplus, S&P said.

With the sale, the city hopes to save $1.3 million, or 4.5 percent of the par value of the refunded bonds, Brodsly said.

"It’s a good story of redemption and how you can take a very bad situation and turn it into a very good situation,” said Bell’s chief administrative officer Howard Brown Jr. in an interview.

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