The city of Bell's borrowing power took a significant hit Tuesday, when Standard & Poor's Ratings Services downgraded the beleaguered city's bonds to junk status because of its inability to pay off a looming $35-million debt.
Standard & Poor's lowering of Bell's bond ratings by five steps to BB comes after The Times' report Saturday that the cash-strapped city has said it cannot meet the Nov. 1 payoff date on lease-revenue bonds it floated three years ago to buy surplus federal land for a rail shipping facility that never materialized.
Bell now faces possible foreclosure on the land, near the 710 Freeway, which was to have been leased to Burlington Northern Santa Fe Railway. The city's plan for the property fell apart in 2008 after Bell officials failed to conduct basic environmental reviews.
The city is behind in its payments and has told the bondholder, Dexia Credit Local, an arm of a European bank, that it cannot meet its obligations.
That, along with the recent resignation of City Manager Robert Rizzo and the declining value of the property that secured the bonds, "have created uncertainty as to the city's future actions," said Standard & Poor's credit analyst Michael Taylor. The service responded Tuesday by lowering its ratings on Bell's general obligation bonds and pension obligation bonds to BB from A-. Its underlying rating on the city's series 2005 lease revenue bonds dropped to BB- from BBB+.
A rating below BBB is considered "non-investment-grade" or "junk," meaning the security is considered inappropriate for investors who can't afford the risk of loss.
The result, analysts and others say, is that the value of Bell bondholders' investments will go down while the city's cost of future borrowing will go up.
"It's adding insult to injury," said Tom Dresslar, a spokesman for State Treasurer Bill Lockyer. "First, folks in [Bell's] upper management were making outrageous salaries and pulling in outrageous benefits. Now taxpayers will have to pay more money when the city wants to go to market to sell bonds. They've already been shafted by city leaders down there; now they're taking another hit in terms of higher borrowing costs."
Bell's credit problems are the latest dose of bad news for residents of the working-class city of about 39,000 since The Times revealed last month that Rizzo was making nearly $800,000 a year. The newspaper has since reported his total compensation was more than $1.5 million and that other top officials, who also have resigned, were making as much as $845,000 a year.
Rizzo previously has defended his compensation, thought to be the highest of any city administrator in the country. He could not be reached for comment Tuesday.
Pedro Carrillo, Bell's interim city manager, said he learned of the ratings drop early Tuesday while preparing to meet with attorneys to discuss the city's bond obligations.
"It is concerning," Carrillo said. He added that it would be difficult to know how to deal with the ratings downgrade until he gets a report from the state controller about the overall fiscal health of the city.
"We're kind of just watching it happen right now," he said of the S&P action. "It's a very complicated matter. And until I fully understand what the issues will be, I can't know what the solutions will be."
The ratings drop will severely hamper Bell's borrowing power and demonstrates that the failed railway lease deal already is affecting the city's finances, said one municipal bond investor who is tracking the city's finances in the wake of the salary scandal.
The $35-million financing arrangement was through a type of bond designed in part to shield the city's general finances. Indeed, when Rizzo presented the deal to the City Council, city documents show, he assured them the city's general fund would be protected.
However, that firewall might not be enough to fully protect the city, said Erik R. Schleicher, a trader and fixed income analyst with M&I Investment Management Corp. in Milwaukee.
Government agencies routinely issue bonds to borrow money to finance public projects, and the ratings drop "is going to make it significantly more difficult and onerous to borrow" in the future.
"People will know the city hasn't been able to step up and pay off bonds," Schleicher said. "The municipal bond market will remember."
It is rare, Schleicher said, for government entities to default on their loans — rare enough that the major ratings services, including S&P, recently recalibrated the ratings of general-obligation bonds and bonds that are backed by municipal financing authorities. With the new base lines in place, Schleicher said, "there aren't too many cities in the non-investment category."
There are few parallels to Bell's situation, Schleicher said. One is Menasha, Wis., where officials decided to convert a power plant into a steam-generating operation. The town borrowed almost $40 million for the project, which was shut down recently when revenue fell short — leaving its roughly 17,000 residents deeply in debt and prompting three debtors to sue.
Matt Fabian, a principal at Municipal Market Advisors, an independent research and consulting firm in Concord, Mass., said investors should be wary of Bell's bond issues.
"Frankly, S&P is being generous with the BB; the city's willingness to pay is deeply suspect, and its management has been reckless," he said. "The city's bonds should only be purchased by high-yield investors at a steep yield premium that compensates them for this risk."