When cities across California lost their battle to keep redevelopment agencies late last year, Grover Beach was among them.
Now, the city is facing the fallout from that decision.
Earlier this year, city officials dipped into the now-defunct redevelopment agency’s reserve account to make a biannual debt payment — a choice that prompted a rating agency to drop the Grover Beach Improvement Agency’s credit rating and resulted in a research firm adding the agency to its list of financially troubled agencies in the state.
The Grover Beach Improvement Agency has since appeared in national news stories alongside Stockton and Mammoth Lakes, which declared bankruptcy within the past month.
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While Grover Beach has made multiple rounds of deep budget cuts, city officials say their community shouldn’t be lumped into the same category.
Rating agency Standard & Poor’s lowered the Improvement Agency’s rating to “BBB” from “BBB+,” indicating that it had an “adequate capacity to meet financial commitments, but was subject to adverse economic conditions.”
City officials say the issue that led to a downgraded credit rating was an unusual, one-time occurrence that directly resulted from state lawmakers’ decision to eliminate the more than 400 redevelopment agencies in California.
“We haven’t declared a fiscal emergency,” City Manager Bob Perrault said. “We don’t expect to. It was essentially a single event. That’s not to say that cities across the state aren’t struggling — they certainly are — but this issue is not reflective of the fiscal health of the city.”
The bond rating affects the interest rate the city or agency might receive when it issues bonds. While the two are separate legal entities, the lowered rating could impact Grover Beach if it makes future lenders wary of issuing bonds to the city.
“There is a potential for the event to affect future bonds sought by the city, as the distinction of successor agency and the city being legally separate entities may be blurred or overlooked by the underwriters in the future,” city attorney Martin Koczanowicz wrote in an email to The Tribune.
The city’s financial adviser could not be reached for comment.
Redevelopment agencies, which were eliminated Feb. 1, use a portion of property tax revenue to pay for projects in areas that have been labeled blighted.
While advocates said the agencies have helped job creation and economic growth in their areas, critics accused the agencies of acting as development slush funds and noted that they take money that would otherwise go to schools and other services.
Now, it is up to a so-called successor agency to wind down each redevelopment agency and make sure all obligations are met. The Grover Beach Successor Agency is staffed by city officials and overseen by a seven-member board of officials from local agencies, including schools and other special districts.
Twice a year, in February and August, the redevelopment agency was required to make a debt payment on a $4.39 million bond, which was issued in 2005 and funded street improvements, storm drain repair and other projects.
Normally, if officials did not have enough cash on hand to make the payment, they’d borrow money from the city’s general fund and repay it the next time the agency received its share of property tax revenues.
This type of cash-flow borrowing is common, said analysts with the state Legislative Analyst’s Office.
Such a situation occurred in January, when Grover Beach lacked enough money to make a debt payment of $96,243 that was due Feb. 1.
The city could have used general fund money to fill the gap, but with the redevelopment agencies in the process of being eliminated, city officials didn’t know if they’d be able to recoup the money.
They borrowed from bond proceed reserve funds to make the payment. In the meantime, Standard & Poor’s lowered the improvement agency’s credit rating and assigned a negative credit watch status, meaning the rating could be lowered.
That status was changed to stable this week, meaning the rating is unlikely to change, Perrault said. The agency retains its “BBB” rating.
Also, Municipal Market Advisors, which conducts independent research on the municipal bond industry, included Grover Beach on a list of troubled issuers along with 10 other California cities and redevelopment agencies.
Calls to two MMA managing directors were not returned.
The reserve fund was repaid in June, and Perrault said he does not foresee a problem making regular debt payments on the bond.
The successor agency will continue to receive property tax revenues to make bond payments as well as pay any other outstanding debts the redevelopment agency incurred.
The property tax revenues are calculated based on the assessed value of property within the Grover Beach Redevelopment Agency boundary. There’s no guarantee that property tax revenues won’t decrease in future years, but officials in the county Auditor-Controller’s Office don’t anticipate the market dropping any further.
County officials predict 0.9 percent growth countywide in assessed property values for fiscal year 2012-13, which will offset the decreases from the prior two fiscal years, Assistant Auditor-Controller Jim Erb said. The amount will vary by individual taxing areas.
The Grover Beach Successor Agency may also be able to borrow money from the county treasury to make the bond payment if needed, Erb said.