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| City sets framework for bond issue By Mark Noack [ mark@hmbreview.com ] Published/Last Modified on Wednesday, December 24, 2008 1:16 PM PST Half Moon Bay set the stage to issue up to $23 million in bonds last week, laying the groundwork for the city’s fallback strategy to pay off the massive Beachwood debt. But relying on borrowing tens of millions from lenders could commit Half Moon Bay to a debt repayment plan that would be of unprecedented scale for a California city. Although many undetermined factors are at play in issuing bonds, the standard 30-year plan submitted by the city’s consultants is estimated to consume approximately 13 percent of the city’s general fund. The city faces financial catastrophe after a longstanding series of court battles with developer Charles Keenan over development on the 25-acre Beachwood parcel. After a disastrous loss in a federal trial last year, Half Moon Bay leaders agreed to a settlement with Keenan that committed the city to pay $18 million or find a way to allow the developer to legally construct 129 homes on the site. City Council members and consultants have tacitly agreed the city’s only option now is to pay Keenan the money. Half Moon Bay has an annual budget of about $11.7 million and is unable to pay off the debt on its own. The best solution, city leaders say, is that some, or all, of the huge financial burden can be relieved through an aid bill from the state Legislature. However, the city made little progress on that over the summer. And, even as city leaders are sending their prayers to the Legislature, they’re sending the financial wizards to the bond market. Estimates indicate a standard 30-year bond plan for the city would cost $1.6 million annually, or 13 percent of the city’s budget. A state official well versed in municipal debt says the city’s bond option was not advisable. “Typically when we talk about these things, a city’s debt service shouldn’t exceed 6 or 7 percent,” said the official, who asked not to be identified. “Even the state of California only has a debt service of 6 percent.” The official knew of no municipality in a comparable situation, because he said, the level of debt faced by Half Moon Bay leaves it in a league of its own. Half Moon Bay leaders are not sure voters would appreciate the severity of the Beachwood problem. In many aspects, a safer bond option for the city would have been general obligation bonds, which would have tied the city debt repayment to local property taxes. However, such a bond would require two-thirds approval from voters, which typically is a difficult hurdle for any municipality to achieve. “Getting a general obligation bond passed means you got to go out and convince people its necessary,” said Michael Coleman, fiscal policy advisor for the League of California Cities. “People have to have confidence a bond is necessary and the city is doing a good job of managing its resources and conducting its business.” The city’s financial policy adviser, Marc Curran, says going for a general obligation bond would have been problematic. “It’s a silly question. The city can only do a general obligation bond if the voters approve it,” Curran said. “It’s a two-third election. Anyone with any sense would realize that’s pretty problematic.” Following the advice of its consultants, the City Council members opted for lease revenue bonds, an option that would lease a host of city property to finance the bond. “There’s like two or three (lease revenue) financings like this that happen every week in California,” Curran said during the last City Council meeting. “Most cities in the county have probably used similar funding to fund various projects.” The plan, which would be enacted in late spring, has the city ante up various properties, which could include city hall, the police station, library and various parks. Those properties would, in effect, become collateral to entice investors to purchase bonds from a city-controlled joint powers agency. And how will the city pay back the bond receipts? Losing more than one-tenth of the budget means the city will have to make cuts, levy taxes or increase fees. According to city consultant John Knox, the city could lose possession of its own civic infrastructure if the city were to default on its debt. Financial experts say that scenario is unlikely, but possible. “It’s hard to imagine what would happen if that were to occur,” Coleman said. “But how could a police or fire station be useful to anyone else?” One inevitable consequence of a debt default would be a weakened credit rating. Several credit agencies still blacklist the Richmond Unified School District, which failed to repay its lease revenue bond decades ago. During its meeting last week, the City Council nixed the idea of selling city-owned property to directly pay the $18 million. City Engineer Mo Sharma showed 80 lots owned by the city, 30 of which he identified as possibilities for sale. The scattered parcels, many of which were too small for development, were seen as “valueless” by one council member. The city does own several large, well-situated properties, but they are generally restricted for public services. “Frankly there’s nothing here that you can build anything on,” said Councilwoman Naomi Patridge. “There’s not too much value because the lots are really small, and the major ones aren’t sellable.” “I think we have to convince the bonding agencies that it’s all beautiful beach-front property,” said Mayor John Muller. |