Bloomberg News

Stockton, California, Warns of Possible Default on 2006 Debt

October 21, 2011

Oct. 21 (Bloomberg) -- Stockton, California, which declared a fiscal emergency in May, warned it may default on redevelopment agency debt issued in 2006, citing a shortfall in tax-increment revenue.

Debt service will exceed available revenue by about $858,000 in the North Stockton project area, according to an Oct. 12 filing with the U.S. Securities and Exchange Commission.

Standard & Poor’s downgraded the underlying rating on series 2006A and 2006B revenue bonds issued by the Stockton Public Financing Authority on behalf of the Stockton Redevelopment Agency to B from BB with a negative outlook in an Oct. 4 report, citing declines in assessed valuation for real estate in the redevelopment area. The redevelopment agency said it expects a 3.17 percent drop in values for fiscal 2012.

“The city has experienced persistent negative economic effects of housing market stress and the recent recession in our view, but the declines in some economic indicators appear to be moderating,” the report said.

Stockton spokeswoman Connie Cochran declined to comment on the debt-service shortfall.

The city, an agricultural center about 80 miles (130 kilometers) east of San Francisco, will reduce the shortfall with a $137,249 North Stockton cash surplus held by the trustee from reserve fund interest earnings and money released from a reduced reserve requirement after a 2010 bond-repurchase program, Stockton said in the filing.

Reserve Account

“The agency expects that the trustee may be required to draw on the North Stockton Reserve Account to make up the remaining shortfall” depending on the agency’s ability to use unspent project fund balances to make up the difference, according to the filing.

U.S. municipal defaults fell in the last quarter to 12, totaling $126 million, from 18 a year earlier and 24 in the same period of 2009, according to the Distressed Debt Securities Newsletter.

S&P included Stockton’s redevelopment agency tax allocation bonds in a list of 16 ratings put on negative credit watch in an Oct. 14 report. A negative outlook means more downgrades may come.

“The CreditWatch is due to the agencies’ reliance on unpledged resources to meet debt-service payment obligations, particularly in light of new legislation regarding redevelopment agencies that we believe could further deteriorate already weakened credit characteristics,” S&P credit analyst Sussan Corson said in the report.

The California Legislature this year approved a law that requires redevelopment agencies to turn over about $1.7 billion next year and about $400 million annually thereafter to schools and local governments.

--Editors: Pete Young, Jerry Hart

To contact the reporter on this story: Alison Vekshin in San Francisco at avekshin@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.


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