It has happened in Temecula--a $27.5-million, Mello-Roos municipal bond has formally fallen into default.
Now the local school district and a development firm are left to fight in court over who must pay the bond debt.
One attorney representing the Temecula Valley Unified School District predicted that the collapse will have dire consequences for other school districts that would like to use Mello-Roos proceeds for expansion or repairs.
"It (the default) has jettisoned the ability of this and every other school district in California to sell tax-exempt bonds for infrastructure," said John E. Brown, a bond specialist with the Riverside law firm of Best, Best & Krieger.
The failure of the Mello-Roos district in Temecula adds to the increasing uncertainty associated with this form of municipal-bond financing. Since 1983, $3.6 billion of Mello-Roos bonds have been issued, paying for streets, sewers, curbs, gutters and schools in dozens of expanding California communities.
Following The Times' publication earlier this month of a three-day series that pointed out the emerging downsides of Mello-Roos financing, California Treasurer Kathleen Brown has called a special hearing of the state Debt Advisory Commission on Jan. 15 in Santa Ana. The articles reported that as many as 10 of California's 226 Mello-Roos districts are expected to default in the next two years.
The collapse in Temecula became formal on Dec. 10, when the development firm that was teaming with the school district failed to pay about $1.8 million of taxes due on the property. A representative of the development firm confirmed that $1.1 million of that total was to have gone toward repayment of the Mello-Roos bond.
"They (the development firm) are now in default" on the taxes, said John D. Brooks, an assistant superintendent for the school district.
The bulk of the Mello-Roos bond proceeds--about $23.5 million--was to have been spent for curbs, gutters, streets and other amenities at a 2,000-unit, senior-citizen housing development. None of the homes or condominiums has been built.
The school district has already obtained and spent its share of the bond proceeds, about $1.1 million, for expansion of a high school and construction of two elementary schools, according to a district administrator.
The Mello-Roos bond is secured by the 470 acres of land that was to have been developed as Margarita Village, a retirement community surrounding a golf course that has been built.
But the development firm contends in a lawsuit that it is not responsible for making the tax payments because $23.5 million of the bond proceeds has been inaccessible since April.
"They're trying to invalidate the tax levy and avoid paying the taxes," said Debra Healy, a Los Angeles lawyer who also represents the Temecula school district.
From December, 1989, to April, 1991, the $23.5 million had been invested in a "guaranteed investment contract" that was managed by Executive Life Insurance Co. But when state regulators seized control of Executive Life in April, all of the insurance giant's proceeds were ordered frozen.
In a prepared statement, San Diego-based developer Robert F. Buie attributed the bankruptcy filing last week of the Margarita Village Development Co. to the collapse of Executive Life.
"If Executive Life had not failed," Buie said, the Margarita Village Development Co. "would be selling homes today."
Instead, Margarita Village filed for protection from creditors last Wednesday under Chapter 11 of the federal bankruptcy law. Margarita Village is composed of two limited partners. One is controlled by the Buie Corp., the other by PriMerit Bank of Las Vegas.
Buie said that he does not expect the failure of Margarita Village to have "any adverse impact" on the Buie Corp., one of Southern California's largest home builders.
A foreclosure sale on Margarita Village's 470 acres had been scheduled for Thursday but has now been canceled because of the bankruptcy, according to Brown, the attorney for the school district.