LOS ANGELES - The problems of special districts in California probably will persist well beyond the state's current economic downturn, based on historical patterns elsewhere, Standard & Poor's Corp. said yesterday.
Only a small proportion of special assessment and Mello-Roos special tax bonds "may default, but if they do, the actual defaults" could trail the downturn "by a substantial margin," the rating agency said in a Credit Week Municipal report.
The historical record in Colorado and Texas tends to "bear this out," the report says, because special district problems in those states often surfaced years after housing permit statistics revealed a sharp downturn in construction activity.
The lag occurs, the report adds, because "it takes time for developers to run out of money, for tax payment dates to come due, and for debt service reserves to be exhausted."
David Hitchcock, the Standard & Poor's analyst who wrote the report, has outlined this theme previously in presentations to market participants. Yesterday's report expands on the topic by offering further substantiation for the hypothesis, including a mix of statistical and anecdotal evidence.
Hitcheock stressed that while bond issues require a case-by-case, analysis, California's special district bonds often carry better value-to-debt ratios than elsewhere, which provide more of a cushion in a downturn. For instance, the California bonds generally offer more protection than the Colorado issues that defaulted, he said.
Nevertheless, "there are increasing reports of delinquencies in a number of California special assessment and community facilities districts that sold debt in the late 1980s" the report says, and "these delinquencies may be expected to grow."
Real estate conditions "are highly localized," so special districts do not necessarily default even in areas with severe economic troubles, the report says.
The issues of "undeveloped or concentrated special assessment districts, with no flexibility to raise tax rates, in general may face more risks than Mello-Roos bonds, which have a limited tax-raising flexibility," the report says.