Wasco Narrowly Averts Marks-Roos Bankruptcy
The City of Wasco in Kern County is trying to stave off municipal bankruptcy as a result of a series of problems with Marks-Roos and other bonds. The possibility of bankruptcy compounds the legal and financial problems facing the city, including a "cease-and-desist" order in May from the U.S. Securities & Exchange Commission which bans the agencies from issuing further bonds. Wasco was one of three California municipalities, including the City of Ione and Nevada County, to consent to the cease-and-desist orders.
Both Wasco's financial straits and the SEC order are evidence of the mounting problems stemming from the poor performance of certain Mello-Roos and Marks-Roos bonds, particularly when used to finance speculative real estate projects. The city owes nearly $12 million in both bond payments and legal judgments, although the city's annual budget is only about $8 million, according to the California Debt and Investment Advisory Commission.
Many of Wasco's current difficulties center on defaults on bond payments on a golf course in the city. In 1989, Wasco Public Finance Authority spent $8.86 million of bond proceeds to finance the construction of the Valley Rose Golf Course. Under the repayment structure, the bonds were to be repaid by golf course revenues, and the city would make up any shortfall in payments out of the city's general fund. In addition, the city itself leased the golf course from the developer, and attempted to run it as a business.
The golf course, however, has never been profitable, and the city is at least $2.75 million in arrears on lease payments. Last November, a Kern County Superior Court judge issued a statement of intended decision that required the city to make the late lease payments, plus interest of 12% annually after November 1997. In the same statement of intended decision, the judge authorized the bond trustee, State Street Bank and Trust Co., to pursue deficiency judgments against the city directly. The judge also approved foreclosure proceedings against the golf course.
To date, however, the city has been unable to make any further lease payments on the golf course, according to the Debt and Investment Advisory Commission. A court-appointed receiver is in charge of all golf course revenues.
The city, which has gained notoriety in financial circles for both its high debt level and its troubled land-based bonds, is hoping to find a negotiated solution with bond trustees, to avoid filing Chapter 9 bankruptcy. "We have decided not to take that drastic step without evaluating every possible means to avoid it," said contract city attorney Tom McCartney. The city may face a challenge, however, in convincing the bond trustee to renegotiate the level of the bond payments, according to McCartney. He reported that the bond trustee of a golf course in Wasco financed by a Marks-Roos bond, State Street Bank & Trust Company of Boston has indicated ominously that "legally, it cannot compromise the rights of the bond holders. Therefore, as a corollary to that, it cannot compromise the lease obligation," that is, the lease payments that the city is making on the golf course. As a result, he said, "the trustee has taken the position that he will force us into bankruptcy, unless we can compensate the bondholders."
The city is currently consulting with financial experts to review its options, according to McCartney. One state official, who asked not to be named, said one possibility for Wasco is an "asset transfer" sale, in which the city sells off a major asset, such as a utility or water company, leases back the services, and uses the sales proceeds to pay off the bond debt. Wasco has both water and sewer districts that could possibly be sold.
Wasco has other obligations and judgments, as well. The city has also defaulted on $4 million of industrial development bonds, and may be facing a lawsuit from an attorney the city had hired to sue Richardson and First Capital, who has now sued the city for non-payment.
Troubles with Wasco's golf course are part of a larger set of difficulties stemming from land-based bonds underwritten by First California.
In February, the U.S. Securities & Exchange Commission charged three California bond issuers with securities fraud. Significantly, all of the securities at issue were Mello-Roos and Marks-Roos bonds underwritten by the San Diego-based firm of First California Capital Markets Group. The federal agency charged the Wasco Public Finance Authority, the City of Ione, and Nevada County with a variety of offenses, centering on failure to make disclosures in official statements about the true nature of the risks entailed in development projects that were to provide the revenue to pay off the bonds.
Among the charges:
o For a $35 million Marks-Roos bond issued in 1989 by the Wasco Public Finance Authority, the official statement for the offering to investors failed to warn investors that the projects were "highly contingent, if not speculative."
o For a $9.07 million bond issued in 1991 by Nevada County to finance the Wildwood Estates residential project, the official statement misrepresented the value of the property, the developer's experience and financial qualifications, and the plan by which the developer intended to finance the project. The developer of the 286-acre project reportedly abandoned the development shortly after receiving the bond proceeds.
o For a $14 million Mello-Roos bond issued in 1991 by City of Ione for the Castle Oaks Residential project, which includes a golf course, the official statement misrepresented the developer's ability to complete the project with the bond proceeds alone, the value of the underlying land, and the adequacy of other funding sources to enable the developer to complete the project. Specifically, the statement failed to mention that the project needed $3 million more than the $7.5 million being provided out of the bond proceeds.
The securities-fraud charges and the subsequent cease-and-desist order in May were the outgrowths of a two-year investigation by the federal agency into municipal bond fraud.
In May, all three municipalities consented to a "cease-and-desist" order from the SEC, which essentially banned those agencies from issuing further securities for the time being. Two other defendants, including Virginia Horler, a Dain Rauscher securities broker who was a financial consultant to Nevada County and William McKay, A real estate appraiser who worked for both Ione and Nevada County, have not settled with the SEC and are scheduled to appear before an administrative law judge in July.
Tom McCartney, contract city attorney, City of Wasco, (805) 327-4147.
Riley Walter, bankruptcy attorney for the City of Wasco, (209) 438-2390.