LOS ANGELES --A ratings downgrade on Huntington Beach, Calif.'s $32.4 million of outstanding tax allocation bonds was triggered this week when it was disclosed that tax increment revenues in a troubled redevelopment project will fall $89,000 short of debt service requirements this year.

Moody's Investors Service lowered its rating on the bonds to a speculative-grade Ba on Tuesday, marking the first time it has assigned a below investment-grade rating to a California tax allocation bond, Moody's assistant vice president Ronald L. Junker said.

The bonds were rated Baa when first issued in May 1992.

"Ba is judged to have some speculative elements," Junket said. "Their future cannot be considered to be well assured."

Moody's attributed the downgrade to loss of assessed valuation in the Huntington Center project area, one of four project areas in the city whose tax increment revenues are pledged to pay debt service.

Assessed valuations at the Huntington Center project area have declined 16% in the current fiscal year. The erosion was blamed on taxpayer appeals that lowered their property-tax, and the departure of one of the four anchor retailers from the project area's shopping mall. Also, demand for office space has been anemic.

Tax increment revenues available for debt service for the Huntington Center project area in fiscal 1995 are projected to be $952,000, while debt service requirements total $1.04 million.

To resolve the crisis, Huntington Beach hopes to create a single project area by merging the Huntington Center project area with four others, Robert J. Franz, Huntington Beach deputy city administrator, said yesterday.

The merger, which will improve the overall debt service coverage ratio, should occur within six months, Franz said. Following the merger, the city would apply to Moody's for an investment-grade rating assignment, he said.

The immediate tax-increment revenue crisis, which involves the Huntington Center project area only, will be resolved through the tapping of interest-income earnings, which total about $400,000 annually.

The city will not need to tap the project area's debt service reserve fund, Franz said. A bond default is extremely remote, he said, because "there is plenty of money to pay debt service."

"Ironically, the Huntington Center project area, where we have this assessed value decline, happens to be the project area where we have the largest amount of reserves out of the four project areas," Franz said.

"In addition to debt reserves of roughly $1 million, which are held by the trustee, we have project reserves of $5 million," he said.

Despite the healthy reserves, Moody's Junker said the rating is based on a so-called "weak link" structure. Under this legal setup, tax increment revenues generated by one project area are pledged only for the repayment of that area's portion of the debt. Therefore, a shortfall in the payment stream of an individual project area would result in a default on the entire issue.

Huntington Beach is Orange County's third largest city, with a population of 109,000. On Tuesday, the city is scheduled to sell via negotiation $4.6 million of tax allocation bonds for housing purposes, Franz said.

The bonds were rated A-minus by Standard & Poor's Corp., but will be upgraded to triple-A because they will be insured by Capital Guaranty Insurance Co., Franz said. The security for the bonds will be a pledge of so-called "housing set-aside" tax increment revenues.

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