Bad Report on Oceanside District Bond May Hurt Refinancing

Oceanside city officials fear that a recent report by Standard & Poor’s could make it more difficult for the financially ailing city to refinance $7 million in bonds at lower interest rates.

The Nov. 4 report singled out the Williams Ranch Facilities District in eastern Oceanside as the only Mello-Roos bond “currently in trouble” of defaulting in California. The report also suggested that the district might be the first of many defaults among Mello-Roos districts, which were set up to finance roads, sewers and other improvements in new developments.

But city officials say Standard & Poor’s--a financial information firm that, among other things, rates and analyzes debt services--has incorrectly assumed that the Williams Ranch district in eastern Oceanside is in trouble. The city maintains that most of the district’s problems have been corrected, and that Oceanside is committed to making regular payments to keep the district solvent.

The report is just the latest trouble to beset the district, which was created in 1984, before construction of the Sunriver and Peacock Meadow subdivisions of the city.

The Williams Ranch district was created by three developers who intended to used proceeds from the district’s bonds to build roads and sewers. Their plan called for the construction of nearly 1,000 homes. Eventually, home buyers would become responsible for paying off the bonds, with payments based on the value of their individual homes.

But the ill-fated district almost immediately ran into problems.

A handful of homeowners who defaulted on their home loans blamed developers for failing to tell them about the district’s tax obligations. Other families struggled to make payments that rose hundreds of dollars above initial estimates.

One developer went bankrupt and withdrew from the project. Another eventually walked away from the project, claiming that Oceanside’s slow-growth laws had made the project economically unfeasible.

Only a third of the planned homes were ever built, and a flurry of lawsuits broke out among the city, land developers, a title company and disgruntled homeowners.

About 55 home buyers eventually settled one lawsuit that alleged that their subdivision’s developer failed to tell them about the district taxes. A second suit against a title company is still winding its way through federal court.

The city of Oceanside ended another suit by assuming ownership of 10 acres in the district that, because of Oceanside’s slow-growth laws and the slow economy, remain undeveloped. The city also has pledged to pay $330,000 annually to keep the district from defaulting on nearly $7 million in bonds.

A few weeks ago, Oceanside city officials formed a task force of bond counselors and attorneys to look into the refinancing of the bonds. The city had hoped to take advantage of declining interest rates to cut interest payments for both the city and homeowners, but potential bond investors may be scared off by Standard & Poor’s report.

Many municipal finance experts find the district a case study in how not to use special assessment districts to finance construction of roads, sewers and other improvements in new developments.

But, to Oceanside Mayor Larry Bagley, that laundry list of problems is proof that the Williams Ranch district shouldn’t have been highlighted in Standard & Poor’s recent newsletter.

“The city is making sure that the payments are being made,” Bagley said. “We have no intention of letting it default.” And, Bagley contends, the Williams Ranch district wasn’t news to begin with. “These bonds have been in trouble for five years,” Bagley complained. “Everybody knew about it. It’s not something new.”

Standard & Poor’s report deals with a predicted wave of defaults by relatively new special assessment districts in California.

The report suggests that the defaults will parallel a highly publicized string of defaults in Colorado during the late 1980s. There, families lost their homes as more than 40 special assessment districts tumbled into default on an estimated $500 million in debt.

Although Standard & Poor’s stopped short of predicting a Colorado-like collapse in California, the bond-rating company cautioned that there are “a number of troubling points about the current situation in California that bear watching.” The report also chastised state officials for failing to establish “central oversight” over Mello-Roos bonds.

More than $3 billion in Mello-Roos bonds have been issued statewide in recent years. Although some defaults are expected, none have occurred so far, state officials say.

So far, Mello-Roos districts, 24 of which have been created in San Diego County, have performed well, according to bond observers.

“The bonds have allowed development to occur in San Diego,” said Frank Panarisi, president of the Construction Industry Federation. Developers have used Mello-Roos bonds in conjunction with Carlsbad, Poway, Chula Vista and the San Diego Unified School District.

When districts do default, municipalities have the right to foreclose on districts and sell their assets in order to pay off bonds. Oceanside, however, opted to make payments each year to keep the district’s bond payments current.

Bagley supports Standard & Poor’s premise that there could be a wave of defaults among relatively new Mello-Roos districts where developments are encountering serious financial problems because of the continuing economic slowdown.

But, even if defaults occur, it could be difficult to track them, says Dean Misczynski, a member of the California Senate’s Office of Research. “One problem is that there’s no requirement for defaults to be reported, or that even signs of trouble be reported.”

Misczynski, who helped draft Mello-Roos legislation in the early 1980s, cautioned that “there have always been rumors about defaults . . . every month or so we get calls about a supposed default” somewhere in California.

Misczynski also questioned the timing of Standard & Poor’s report. “We’ve been suggesting the possibility of defaults for some time,” Misczynski said. “Logically, that has to be true because there are some significant risks in Mello-Roos bonds.”

Misczynski and others argued that a Colorado-like collapse that would chase families from their homes is unlikely because of built-in safeguards to protect homeowners.

“It’s inaccurate and irresponsible to compare California to Colorado because Mello-Roos districts are different in many ways,” Misczynski said.

At least one homeowner who was caught up in the district’s problems would now prefer to forget the whole episode.

In 1985, the Williams Ranch district and the homes it made possible represented the “All-American dream as far as we were concerned,” said Teresa Dube, a former homeowner in the district.”But it turned into the All-American nightmare . . . that’s exactly what it was.”

The Dube family, which defaulted on its home loan shortly after moving into a house in 1985, saw monthly payments on their $85,500 home suddenly jump from about $900 to $1,234. “I cannot in my wildest imagination see how we could have qualified for that loan at that time if we’d been told about the (extra) taxes,” Dube said. “We got in by skin of our teeth as it was.”

Using savings that had been earmarked for their son’s education and money from a legal settlement, the Dubes were able to remain in the house. And, after four years, they were able to sell the house and move to another home in Oceanside.

“I try not to think about it any more,” Dube said. “Five years ago . . . you could just feel the tension in that neighborhood. . . . It was just incredible. There has a high divorce rate, a high death rate. . . . It was just too much stress to put on a family.”