LOS ANGELES -- In the wake of a Sept. 2 default on a $1.61 million principal and interest payment due holders of San Diego assessment bonds, city officials are considering tapping reserves next month to pay the overdue-interest portion, which amounts to $761,314.

"We have enough money to pay the interest, but not the matured principal" totaling $850,000, Paul Whitaker, an analyst for the San Diego office of auditor and controller, said last Thursday.

Paying the overdue-interest portion of the Sept. 2 payment would nearly deplete the bond interest and redemption fund, which currently has $773,713 deposited in it, Whitaker said.

The separate reserve fund, originally funded with $2.4 million of bond proceeds and first tapped in 1991, was exhausted last year.

San Diego issued $24.1 million of unrated limited-obligation improvement bonds for Assessment District No. 4007, also known as the First San Diego River Improvement Project, in 1987. A total of $20 million of bonds remain outstanding.

The bonds were issued under the Improvement Bond Act of 1915, a section of the California Streets and Highways Code that provides for a method of issuing bonds secured by assessment levies.

The assessment installments appear on the regular property tax bill and are collected at the same time -- in December and April -- as property taxes. The bonds mature each Sept. 2, and interest on the unpaid principal is payable March 2 and Sept. 2 annually.

However, parcels owned by three partnerships, overseen by developer Don Sammis, have been delinquent on the special assessments and property taxes since April 1990. The parcels are responsible for paying about 45% of the debt service.

San Diego is bringing judicial foreclosure proceedings on the parcels. A San Diego County Superior Court trial is scheduled for Oct. 28.

"Once that one-day trial takes place, some of the uncertainties ... will be removed," Whitaker said. Assuming a judgment in favor of the city, a foreclosure sale for the delinquent parcels could occur in late spring 1995.

"At that sale, that could bring everything current, and the issue would disappear," he said.

City council members are scheduled to meet Nov. 1 to weigh their options in light of the Sept. 2 default.

"The anticipation would be that the interest due on Sept. 2 would be distributed to the bond owners within a reasonable time after the Nov. 1 hearing," assuming the court approves the city's foreclosure request, Whitaker said.

Under this scenario, the principal portion of the bonds maturing Sept. 2 "would be paid as funds are received prior to the next interest maturing date," which is March 2, 1995, Whitaker said.

Assessment levies due Dec. 10 "would probably go 100% to pay the principal on the maturing Sept. 2 bonds, which [at that time] were not capable of being paid with the cash on hand," Whitaker said.

The Sept. 2 default is directly linked to the council members' notification last July by city Treasurer Connie Jamison that there was a danger of "ultimate loss" to bondholders stemming from the assessment district's problems.

Under state law, the treasurer's notification required the city to withhold principal and interest payments to bondholders until the council made a determination that an "ultimate loss" is likely.

On Oct. 4, the council held a public hearing, and following testimony from two bondholders, chose to postpone any decision until Nov. 1, after the judicial foreclosure trial.

"The best possible thing is [for the court] to render a judgment in favor of the city," said L. William Huck, a partner with Stone & Youngberg, the issue's underwriter.

"That judgment would say the property owner has been delinquent, none of the owner's defenses have any merit, and the clock will now start ticking" until a legal waiting period ends that allows the sale of the property early next year, he said.

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