LOS ANGELES -- The California Public Securities Association has launched an unprecedented study of assessment bonds issued during the past decade.
The study will not be finished until the end of 1995, but initial findings based on an analysis of financings in several large southern California counties will be released in December.
The vast majority of assessment bonds are financially sound, but some districts are experiencing varying degrees of difficulty.
Bonds issued in recent years to finance infrastructure for real estate development appear to have run into the most trouble. Last month, for instance, San Diego defaulted on assessment bonds originally issued in 1987 to fund improvements in a commercial mixed-used project.
Douglas L. Charchenko, the California PSA's chairman and a senior vice president at Kidder, Peabody & Co., said the study was initiated to help address investor concerns about the lack of secondary market information.
"We're trying to track [assessment financings] to aid in the secondary market trading of this particular paper," he said, noting that last year the California PSA conducted a landmark study of 380 Mello-Roos bond issues in California.
The assessment bond study is needed "given what happened to the California economy" in recent years, Charchenko said. The study will "make sure the secondary market can stay relatively liquid, and the investing public who own [assessment bonds] have a relatively decent understanding of that market," he said.
"We're going to try to find out how many assessment districts are distressed," Charchenko said. "Really, nobody knows. You find out they are distressed when, all of a sudden, you get a call when the reserves have been exhausted."
The California PSA-sponsored study is being conducted by Government Finance Group, a Costa Mesa, Calif.-based data base and technology firm that also handled the organization's Mello-Roos bond study.
Records assembled by the California Debt Advisory Commission, which tracks public debt issuance, show that there have been 1,523 assessment bond issues, including refundings, since 1985 in California. That represents a dollar volume of $7.2 billion.
New-money assessment bond issuance is down because real estate and development activity fell as the recession shrank California real estate's value. However, issuance of refunded bonds has increased in recent years.
"Our study is going to involve a detailed verification process by which to identify the entire universe" that will include new-money and refunded bonds, said Peter Placey, managing director of Government Finance Group.
"I believe there is going to somewhere between 1,800 to 2,000 active issues," he added.
Placey noted that "very few" assessment bonds are rated by credit agencies, and information is not available on many issues.
Investors often rely on information that they usually get through relationships they've developed over the years with the staff of the bond issuer, he said.
The California PSA report prepared on each assessment district will examine a half-dozen key issues, including overlapping debt, delinquencies, diversification of ownership, fund balances, assessed value, and "all of the key things for a land-secured financing," Placey said.
By yearend, the Government Finance Group will have completed an assessment bond report for the southern California counties of San Bernardino, Riverside, and Orange, followed a year later by a report for the entire state.
"We're working to try to become a designated repository for this," Placey said. The company has contacted the Securities and Exchange Commission, but believes "it is going to take some time" to develop such a repository, he said.
The study will focus on assessment bonds issued under the Improvement Bond Act of 1915, a section of the California Streets and Highways Code. The act provides for a method of issuing limited obligation improvement bonds secured by special assessment levies.
Principal and interest on the 1915 Act bonds are paid from corresponding installments billed and collected annually on the general property tax bill of each unpaid assessment.
Special assessments are not taxes, and the obligation to pay principal and interest is not a general fund obligation. In addition, voter approval is not required for the issuance of 1915 Act bonds.
Although California special assessment bonds represent less than 5% of the California market, they have been targeted by taxpayer watchdog groups in recent years. The groups have complained that the district levies are property taxes in disguise, and as such are non-voter-approved substitutes for parcel taxes, which require a two-thirds vote.
Earlier this year, Paul Gann's Citizens Committee failed to collect enough signatures to qualify its socalled Taxpayers Consent Act for the statewide November ballot. The measure would have required either a two-thirds or simple majority voter approval for the creation of assessment districts.
The California PSA is an independent affiliate of the Public Securities Association, the national trade group based in New York City. The PSA has similar affiliations with municipal bond organizations around the country.
The San Francisco-based California PSA has 74 broker-dealers and 39 associate members, which include bond counsel firms, financial advisers, and printers.