LOS ANGELES -- A weakening agricultural industry in Arizona last month pushed one irrigation district into default, and forced another district to draw on its reserve fund to make a debt service payment, state municipal market participants said last week.

The troubled districts -- New Magma Irrigation & Drainage District, and Central Arizona Irrigation & Drainage District -- have a combined total of about $29 million of general obligation bonds outstanding.

The Central Arizona district might file a bankruptcy action if it cannot get bondholders to agree to restructure debt payments, district officials said last Thursday. The New Magma district has been operating under Chapter 9 of the federal bankruptcy code since January.

The districts issued GO bonds in the mid-1980s to complete local distribution systems for water provided by the mammoth Central Arizona Project aqueduct which brings Colorado River water inland.

Taxes are levied on farmers to repay the bond debt and to repay money borrowed from the federal government to build the system. However, farmer demand for the systems' water has been lower than expected, primarily because of a drop in cotton prices and field production, spurring a large rate of grower tax delinquencies.

The farming downturn was notably difficult for the New Magma district, which failed to make a June 1 debt service payment on $4 million of GO bonds, series 1984. The default prompted Standard & Poor's Corp. to lower the district's rating to D from C. In January, the district saw its B rating downgraded to C when it filed for bankruptcy protection.

Meanwhile, the Central Arizona district withdrew $599,000 from its debt service reserves to make a June 1 payment to holders of about $25 million of refunding GOs, series 1989. Last week, district general manager James R. Sweeney said the district is seeking to meet with bondholders to discuss a restructuring of its obligations to avoid bankruptcy.

The two districts' problems first received national exposure when their ratings were downgraded to B from BB-minus last December by Standard & Poor's. At that time, the rating agency also downgraded to B from BB-minus a third Arizona irrigation district, the Maricopa-Stanfield Irrigation & Drainage District. All three districts also were placed on CreditWatch with negative implications.

The Maricopa-Stanfield district, with $26.9 million of outstanding GO bonds, series 1989, made a scheduled payment in June, and "is in fairly good financial shape at this point," said William D. Baker, president of Ellis, Baker & Porter. The Phoenix-based law firm provides general counsel for the three irrigation districts.

While the New Magma district continues to work on a bankruptcy reorganization plan, observers have shifted their attention to the Central Arizona district, whose financial fortunes continue to deteriorate.

Standard & Poor's officials plan to hold a committee meeting to discuss a possible downgrade of the B rating of the Central Arizona district, Jon Reichert, a director for the rating agency, said last Thursday.

The Central Arizona district's problems trace back to 1984, when it issued $24 million of new-money GO bonds to pay for part of the cost of construction of an $84 million water distribution system linked to the Central Arizona Project. It refunded the bonds in 1989.

The bonds cover only about 20% of the distribution system construction costs. Financing for the remaining 80% was provided by the federal Bureau of Reclamation. The district borrowed $66 million from the bureau under a 9(d) repayment contract, and has about $64 million outstanding.

The district is supposed to pay the bureau $800,000 a year -- two $400,000 installments in February and August -- on the loan over a 26-year period.

Earlier this year, the district retained First Interstate Bank of Arizona as its financial adviser to renegotiate the federal contract, Sweeney said. The district also withheld its $400,000 installment due in February -- not because the district did not have the money, but as part of "a strategic decision to withhold that payment until we see the outcome of the [negotiating] process," Sweeney said.

The Central Arizona district's debt burden will have to be renegotiated because farmers are seriously delinquent in their tax payments, Sweeney said. In 1993, for example, 54% of farmers did not pay tax levies for either the GO refunding bonds, or the federal debt, he said.

A disclosure press release from the Central Arizona district issued last week said the district has petitioned the Arizona certification board to call a meeting of bondholders "because of the current uncertainty of the district's ability to repay its long-term debt."

A purpose of the meeting would be to establish "a bondholders' committee to negotiate and adopt an agreement that would seek to alleviate some of the financial difficulties of the district," the release said.

The certification board, consisting of representatives of the state attorney general, director of the water resources department, and banking superintendent, is listed in bond covenants as an agency to resolve problems between bondholders and issuers.

To date, Central Arizona district bondholders have received their scheduled principal and interest payments in a timely fashion, but to meet those obligations the district has drawn down about $1.8 million from its $3.6 million debt service reserve fund in the last 13 months, Sweeney said.

The Eloy, Ariz.-headquartered district withdrew $1.2 million from the reserve fund to meet the June 1, 1993, principal and interest payment, and it withdrew $599,000 to meet the June 1 payment, Sweeney said. However, the reserve fund was not tapped to make the Dec. 1, 1993, interest payment.

An interest-only payment of $751,175 comes due on Dec. 1, and Sweeney said he does not know if the district will again have to draw on the reserve fund, which at that time will have about $2 million in it.

"It depends, frankly, on what our collections of taxes are at that point. Obviously, the debt service reserve fund wouldn't have to be tapped for the whole $751,175" because some taxes will be collected.

But the reserve fund is not being replenished, Baker said.

"The district does have sufficient funds to make payment of principal and interest on the bonds through the June 1, 1995, payment," he said. District officials "will then be faced with making a decision about what do they do to pay [debt service] in fiscal 1996," Baker said.

Meanwhile, the Central Arizona district directors have asked supervisors for Pinal County, Ariz. -- where the Central Arizona district is located -- to lower the per-acre levy paid by farmers to $20 from the current $43 an acre, Sweeney said. But supervisors, responding to demands of bond covenants, are considering raising the levy to as much as $80 an acre.

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