LOS ANGELES -- Officials in Oceanside, Calif., last week approved a refinancing plan for a troubled community facilities district bond issue for which the city has helped cover debt service.

The refinancing for the Williams Ranch Community Facilities District affects a $7 million issue sold in November 1984 at a net interest cost of more than 12%. Such bonds are commonly known as Mello-Roos deals, named after the legislation that authorized special taxes providing security for the debt.

Sandra Schmidt, the city's director of financial management, noted that the district might obtain rates closer to 7% or lower in today's market.

Such savings would benefit property owners in the district, who pay special taxes to support the bonds. But Oceanside also would benefit because money from the city's general fund has helped keep bond payments current.

The district encountered troubles in the mid-1980s when owners of a large parcel of land failed to meet special tax payments. The parcel accounts for about 25% of the district's tax lien obligations.

In response, Oceanside opted to step in and lease the parcel and pay its special tax, thereby keeping debt service payments up to date. Oceanside also pledged to replenish the reserve fund for the bonds over the life of the issue, which matures in 2004. Those reserves were drained when the district encountered difficulties.

Over the last two years, Oceanside has spent about $230,000 annually out of its general fund to cover the special tax payment. The city has also spent nearly $100,000 annually to replenish the reserve fund.

The proposed refinancing of about $8 million will replenish the reserve fund completely, relieving the city of its annual payment for that purpose, Schmidt noted.

Oceanside will continue to make its special tax payments on the troubled parcel, but the annual burden should decline significantly once the interest rate is lowered, Schmidt said.

City officials also hope that the lowered tax burden will enhance the attractiveness of the parcel for potential development on at least part of the land, Schmidt said. Bringing in a new taxpayer would also lower the city's tax burden, she added.

The original bond proceeds financed street improvements. A weakened real estate market and an initiative limiting growth in Oceanside helped contribute to the district's problems, city officials said.

Oceanside officials previously expressed unhappiness that the district was singled out for special attention -- including in newspapers such as The Wall Street Journal in 1991 -- as an example of what can go wrong with Mello-Roos deals. Despite the problems, city officials believed they also should have received credit for stepping in and keeping the district afloat.

Schmidt said she hopes the refinancing marks another step in putting the district's problems to rest.

Sutro & Co. plans to underwrite the refinancing issue early next year, Schmidt said, adding that the original bonds, which are subject to redemption in 1994, will be defeased through an advance refunding.

The refinancing will be carried out with a bond sale through the Oceanside Building Authority.

To help strengthen the backing for the refinancing, Oceanside is pledging four fire stations as security through a lease arrangement between the city and the authority.

That structure will provide double-barreled security, Schmidt explained, noting that the lease payments would kick in if a shortfall developed in the district's special tax collections.

Schmidt said the added security should draw a solid stand-alone rating for the transaction or make it more attractive for credit enhancement.

She credited Public Financial Management, the financial adviser, for helping develop the lease wrinkle providing added bond security.

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