Hercules defaults on redevelopment bond payment
By Tom Lochner, Contra Costa Times
Posted: 02/01/2012 07:01:08 AM PST
Updated: 02/01/2012 07:02:54 AM PST
The Hercules Redevelopment Agency is in default on a $2.4 million bond interest payment due today.
"It was inevitable there would be a default because there's not enough tax increment," City Manager Steve Duran said late Tuesday after a session in Contra Costa Superior Court in Martinez with the bond insurer, Ambac Assurance Corp.
The redevelopment agency's bond debt obligations have exceeded revenue from property tax increments in recent years, and as of this week, the agency's non-housing component was $3.8 million underwater, Duran said.
"You can't get blood from a turnip," he said.
Ambac's suit accuses Hercules of misappropriating pledged property tax proceeds that were supposed to be transferred to trustee Bank of New York Mellon Trust Co. five days before the Feb. 1 due date of the interest payment. In a court declaration, Duran said Hercules deposited all of the $4.1 million in tax increments it received in December into a Pooled Cash Investment account that is drawn on to pay for various restricted and unrestricted activities. That account was tapped in August 2011 to pay $5.3 million in bond debt service, Duran said.
Ambac petitioned the court on Tuesday to force Hercules to turn over the entire $4.1 million, or alternatively, to freeze those funds or attach other Hercules assets such as some real estate.
The $2.4 million represents interest due Feb. 1 on two tax allocation bond issues dating to 2005 and 2007; a
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principal and interest payment totaling about $5 million is due Aug. 1.
But court Commissioner Judith Sanders declined Ambac's petition for immediate relief and scheduled a hearing before a judge for Feb. 21.
Hercules' outside attorney, John Killeen, did not dispute an assertion by Ambac's attorney, Jerrold Abeles, that Hercules was technically in default.
"There is a technical default," Killeen said. "The dispute is, what's the proper remedy."
Freezing $4.1 million could cause the city to go bankrupt, he warned.
"They (Ambac) don't care at all if the city shuts down," he said.
Abeles, in a brief, argued that it is Ambac that would suffer irreparable harm unless the court grants relief. Moreover, he argued, Hercules' "illegal seizure of bond collateral" shifts the burden of the city's cash flow problems onto bond investors and Ambac, and threatens the integrity of the institution of bond financing.
"Failure to stop such illegal behavior will shake the public's confidence in the bond market," Abeles warned.
Duran said later Tuesday that he hopes it will not come to bankruptcy.
"If it wasn't for Ambac, we wouldn't be worried about that eventuality," he said, adding that he is disappointed Ambac sued and that the insurer would be better off negotiating a settlement with Hercules; he said he remains hopeful the two sides can come to terms before the next court hearing.
In his declaration, Duran said that during January, Hercules had proposed to Ambac a leaseback deal -- in which a property is sold and leased back to the seller by the buyer -- involving city-owned properties that the insurer now seeks to attach.
Payments on the 2005 and 2007 bonds are due Feb. 1 and Aug. 1.
"If the agency didn't default now, there wouldn't be enough for the August payment," Duran said.
Redevelopment agencies statewide are disbanding pursuant to a California Supreme Court ruling.
"Why would any city without a redevelopment agency throw good money after bad," Duran asked rhetorically, "when the (other) choice is to run a city and maintain public safety and public infrastructure?"
Hercules spends about $1.25 million a month on general operations, including police and other salaries and expenses, according to Duran's declaration. |
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