LOS ANGELES - Los Angeles tomorrow plans to sell its first "judgement obligation" bond issue, a competitive deal that is intended to pay for a costly court order.
Proceeds from the $197 million tax-exempt bond issue will return business-license taxes that the city improperly collected during the last decade from several financial firms and 40 savings and loan associations.
While the bond issue, with maturities ranging from 1993 to 2002, is an unconditional obligation of the city, property taxes cannot be increased to make payments on the bonds.
Los Angeles County fashioned an unconditional obligation structure for a pension financing in 1986, but it is fairly unusual to use debt to pay a lawsuit settlement, rating analysts said.
"We're confident the bonds will save us money in the long run," said Gerry Miller, a finance specialist for the city of Los Angeles. The city will save $17.5 million over the life of the bonds by locking in an interest rate of about 6%, rather than the estimated 7% the city would have paid on a long-term private loan, Mr. Miller said.
"Considering that we have to pay off the savings and loans, this is what we believe to be the most cost-effective way, "Mr. Miller said.
Moody's investors Service rates the bonds Aa1, and Standard & Poor's Corp. gives it a AA-minus rating. In its rating, Moody's said the bonds reflect "strong security provision," noting that the bonds represents an "unconditional obligation of the city payable from all taxes, income, revenue, cash receipts, and other legally available moneys of the city."
Traders said they expect strong interest in the deal. One trader called the bond issue "unusual," but added, "if you're going to be in the market with an unusual bond, this is the time" because of a lack of supply. Yields may range from 5.57% to 6.00%, traders said.
Last Tuesday, Los Angeles sold $29 million of general obligation bonds with a final true interest cost of 5.53%.
The bond issue arises out of a lawsuit, California Federal Savings and Loan Association v. City of Los Angeles. On July 21, 1991, the state Supreme Court ruled the city must refund millions of dollars of business-license taxes collected since 1982. The high court said the city violated a state prohibition inn imposing the levy.
With accrued interest, the city expects to repay a total of about $250 million. Adding to the initial $197 million of bonding, the city will sell another judgment bond issue, estimated at $40 million, later this year or in 1993, Mr. Miller said.
Public Financial Management Inc. is financial adviser on the judgment bond issue, and O'Melveny & Myers is bond counsel.
Los Angeles received legal validation for the bond issue in April from Los Angeles Superior Court Judge Dvintra I. Janavs. In the validation action, the judge rejected arguments by a local city hall gadfly, Leonard Shapiro, who delayed the originally planned April 14 bond sale date by charging that the issue needed two-thirds voter approval.
To determine the legality of the securities, lawyers relied on previous court decisions, such as one involving the city of Long Beach in 1919, which found that bonds financing certain judgments do not require voter approval because the securities are funding obligations imposed by law.
Other California entities are closely monitoring the results of the bond issue.
Legislation sponsored by state Sen. Bill Lockyer, D-Hayward, called the Judgment Bond Act of 1992, or SB 1287, would authorize California to sell GOs for legal judgments. The state Assembly is expected to vote on the bill soon.
While noting that both natural disasters and civil disturbances have recently disrupted Los Angeles Moody's confirmed its Aaa rating on the city's GO bonds when it rated the judgment obligation issue.
"Although a convergence of recent events, including earthquakes, the recession, state budget problems and civil disturbances have focused worldwide attention on the challenges facing the city, its position as the center of a substantial and broad-based economy, responsible and responsive management actions, and modest debt levels remain the principle underlying strengths supporting the ratings assigned," Jeffrey F. Rizzo, managing director of regional ratings for Moody's, said in a statement.