LOS ANGELES -- A city-owned multipurpose facility built with proceeds from revenue bonds will no longer need earthquake insurance following the completion of a refinancing next month, Los Angeles finance officials said.
The planned sale of refunding certificates of participation was sparked by a dramatic increase in premiums for commercial earthquake insurance since January's quake, said Gerry Miller, a finance specialist for the city administrative office.
Los Angeles was required to purchase earthquake insurance when it sold $64.5 million of leasehold mortgage revenue bonds in 1977 to build the Piper Technical Center. The center, which includes an archive for city records and an auto repair facility, o is not open to the public. A total of $46.2 million of bonds are outstanding.
The center was not damaged in the quake.
Following the Jan. 17 earthquake, centered in LOs Angeles' San Fernando Valley, commercial earthquake insurance has become increasingly expensive and difficult to obtain, Miller said.
For example, the annual premium on the Piper center, which expires at the end of July, costs $163,000. To continue it for the next 12-month period will probably cost between $400,000 and $500,000, Miller said.
To make things worse, only one insurance provider appears willing to bid for the city's business.
"People have talked about a potential insurance crisis on the commercial side," said Peter Wong, a first vice president for Grigsby, Brandford & Co.
Grigsby, along with E.J. De La Rosa & Co., are co-financial advisers to the city on the refunding COPs, scheduled to be awarded in competitive bidding Aug. 16.
Most proceeds of the refunding COPs will be placed in escrow to pay debt service on the outstanding revenue bonds until maturity. The proceeds also will fund a reserve account and pay costs of issuance.
Without a refunding, the city would have to continue to buy the costly earthquake insurance -- a failure to do so would be considered a default on bond covenants, Miller said.
Because indentures governing the refunding COPs do not contain restrictive bond covenants requiring earthquake insurance, Los Angeles instead will be legally obligated to self-insure the Piper center against earthquake risk, Miller said.
Self-insuring is the city's usual method to protect major public buildings such as city hall, the Parker Center police station, and the convention center, Miller said.
"Under the self-insurance concept, we basically retain the risk in the city, instead of having insurance companies buy portions of the risk," Miller said.
The proposed refunding' COPs total $46.8 million, slightly larger than the $46.2 million of leasehold mortgage revenue bonds outstanding. The difference will fund various costs of issuance.
Principal and interest payments to holders of the refunding COPs will cost the city $75,000 a year more than it costs to pay debt service on the revenue bonds outstanding, Miller said.
If the city did not issue the refunding COPs and continued to pay earthquake insurance premiums on the existing bonds, it would pay more money over the long run, Miller said.
The proposed issue of refunding COPs will save the city a minimum of $325,000 annually, or $4.2 million over the life of the obligations, which mature in August 2007.
The savings estimate is "conservative," Miller said, adding that "insurance policies tend to go up in price every year."
Another reason city officials support the issuance of refunding COPs is their belief that the existing earthquake insurance would probably not be tapped even if a quake caused major damage to the Piper center.
City risk managers have estimated that major earthquake damage would require $20 million "at most" in repairs to the center, said Lynne M. Ozawa, a city senior administrative analyst.
Yet the existing deductible on any loss is about $21 million. Therefore, the earthquake coverage is "pointless," Ozawa said. "If you have a $21 million deductible, what is the sense in that?"
In a natural disaster, state and federal disaster assistance programs would cover most of the repair costs for damaged city facilities, Miller and Ozawa said.
One other city-owned facility financed with bonds carries earthquake insurance -- a North Hollywood parking garage.
The parking garage sustained some damage in the January quake, but the city did not tap the insurance policy because of a high deductible, Miller said.
As a result, the city's "general fund paid for the repairs" on the garage, Miller said. City officials are now discussing whether it makes sense to refinance the garage bonds, Ozawa said.