LOS ANGELES -- A long-planned sale of revenue bonds secured by assessment levies against 2.2 million parcels -- almost every property in Los Angeles County -- is slated for pricing tomorrow.
The negotiated financing tentatively sized at $176.2 million, is the first of four series of revenue bonds totaling $420 million that a county financing authority plans to issue during the next seven years.
Most proceeds will fund recreation-related projects in the recently formed Los Angeles County Regional Park and Open Space District, a benefit assessment district with the same boundaries as the county's. The area is 4,083 square miles, "roughly the size of Connecticut," county finance analyst Jan Takata said. "I am not aware of a larger benefit assessment district" in the nation.
"We call it the mother of all assessment districts," said Ken Kurtz, a vice president and supervisor of Moody's Investors Service. The rating agency assigned an Aa rating to the revenue bonds last Wednesday. The rating matches the one that Moody's confirmed for the county's general obligation bonds in March, when Moody's downgraded county lease-secured obligations to A from A1.
Standard & Poor's Corp. yesterday assigned its AA rating to the bonds. "This is higher" than the rating agency's AA-minus county GO bond rating, Standard & Poor's director Chris Irwin said. The rating agency also has an AA rating on a county flood control benefit assessment district. Assessment districts "are not vulnerable to the major pressures" facing the county's general fund, Irwin said.
Tomorrow's scheduled pricing culminates 18 months of preparation by county finance officials. In November 1992, Los Angeles County voters, by a 64% approval margin, created the countywide regional park and open space district and authorized it to levy 22 annual assessment installments.
Through a combination of pay-as-you-go cash flow and revenue bond issuances, the district is expected to fund $645.3 million of capital projects through fiscal 2015, Takata said. The $45.6 million of districtwide assessments expected to be collected in the current fiscal year will fund more than 100 projects, primarily the acquisition of open space and wildlife habitats, development of new parks, construction of recreational facilities, and expansion of existing facilities. The county's fiscal year begins July 1.
Officials with Lazard Freres & Co., senior manager of the underwriting, describe the district as a stand-alone credit although it is governed by county supervisors and its projects will be administered by the country's parks and recreation department.
The district's autonomy derives from covenants that specify that assessment levies can fund only district projects, Lazard vice president Russell L. Goings 3d said. The security structure insulates the district from county budget pressures. Conversely, the county's general fund cannot be tapped to make district debt service payments.
This week's financing plans are to issue 16 serial maturities beginning in 1995 and extending to 2010, and issue one term bond due in 2015. After the creation of a $14.5 million debt service reserve fund and costs of issuance are subtracted from gross proceeds, $159.7 million will be available for projects, Takata said.
Lazard expects the deal to interest institutional investors, but co-managers Merrill Lynch & Co., PaineWebber Inc., and Smith Barney Shearson will place emphasis on retail accounts, Goings said. Rounding out the distribution team are E.J. De La Rosa & Co., Henderson Capital Partners Inc., Rideau Lyons & Co., and Smith Mitchell Investment Group.
"Market conditions are going to have an impact" on the financing, Goings said Friday shortly before the April employment gains jolted the bond market, causing fears of inflation and a surge in interest rates.
"Things have been very choppy and volatile over the last couple of weeks," Goings said. "However, we think there is an opportunity for us to get a favorable response" from investors.
"The fact that investors can put a solid, new California name in their portfolio gives the issue viability and credibility," said Les Jacobs, Lazard senior vice president for municipal bond trading and underwriting.
The financing uses a two-step pass-through mechanism that takes advantage of statutes available to California municipal market issuers.
The structure is based on the assumption that if investors have the choice between buying assessment bonds and revenue bonds, a broader range of buyers will prefer the latter.
Special assessment bonds have a narrower market niche because they often are sold unrated. Most such bonds are sold under California's Bond Improvement Acts of 1911 and 1915, and under the structure delinquencies draw down the reserve and there is no extra coverage for bondholders.
In contrast, the revenue bonds issues in tomorrow's transaction will provide 2.25 times debt service coverage, meaning that annual assessment levies will provide 225% of debt service payments.
Revenue bonds "make an easier story instrument to explain to investors" than assessment bonds, Goings said.
This is how the two-step financing will work:
First, the park and open space district will sell benefit assessment bonds, series 1994A, to the Los Angeles County Public Works Financing Authority, a joint exercise of powers authority governed by supervisors.
Next, the public works financing authority will offer its revenue bonds, series 1994A, to the public. The revenue bonds are issued under the legal structure of the state's Marks-Roos Local Bond Pooling Act of 1985. The bonds are secured by the related series of district-based assessment bonds.
The size, interest rates, and maturities of the revenue bonds and assessment bonds will be identical. However, only the revenue bonds will be offered to investors.
Legislation passed in 1991 allowed the county to ask voters to approve creation of the park and open space assessment district. The legislation provided that the district would be formed under the authority of the Landscaping and Lighting Act of 1972, which requires assessment levies to be based on a benefit point formula.
Under the benefit point system, residential parcels contribute 75.2% of total assessment revenues; commercial, 20.5%; institutional, 1.8%; and miscellaneous 2.5%. The fiscal 1994 assessment for a single-family residence on a median-size parcel is $12.52.
Rating agencies are concerned that commercial buildings destroyed by an earthquake "won't be rebuilt," Takata said, decreasing the amount of properties available to levy.
But, requiring residential property owners to provide "a greater share of the burden for the assessments than commercial properties" is "a stabilizing factor," Kurtz of Moody's said.