Agencies’ Bonds Frozen in Executive Life Bankruptcy

What happens when you sell millions of dollars of municipal bonds and invest those proceeds in a “Guaranteed Investment Contract”?

A financial quagmire, if you represent either the Temecula Unified School District or the city of Whittier.

Combined, those two local governments placed about $32.4 million of their Mello-Roos municipal bond proceeds in two guaranteed contracts managed by the Executive Life Insurance firm. Now Executive Life is in bankruptcy, the money is frozen and a ruling on how much of it can be recovered is tied up in court.

The precarious fate of the two agencies’ investments are examples of how Mello-Roos bonds can encounter trouble before developments are undertaken or finished.

In the beginning, the $32.4 million was to have earned interest with Executive Life until the two public agencies were ready to start spending for their separate construction projects. But when all of the money was not withdrawn promptly, the agencies found their Mello-Roos bonds ensnared in the debacle that is Executive Life’s collapse.

“They put it into Executive Life--and it went belly up,” said David O. Taussig, an Irvine-based consultant who specializes in forming Mello-Roos districts.

An agreement announced on Tuesday by state Insurance Commissioner John Garamendi, if upheld in the courts, could reimburse 95% of the investments to all public agencies across the nation that placed money in Executive Life’s guaranteed contracts. Other scenarios would return 60% to 70%.

For Whittier, it could have been far worse.

City Manager Thomas G. Mauk said he is thankful the city had withdrawn all but $800,000 of its $4.9 million of Mello-Roos proceeds before last April, when Executive Life was seized by regulators. Whittier and a developer are using the withdrawn proceeds to build a shopping mall.

“We feel very fortunate that we’re not talking about millions (of potential loss) here,” Mauk said.

In Temecula, they are.

The school district has about $26.4 million of its $27.5 Mello-Roos bond proceeds tied up with Executive Life, according to John D. Brooks, an assistant superintendent of the Temecula Valley Unified School District.

And the developer that was to have used most of the remaining proceeds to build curbs, gutters, streets and other amenities at a new senior citizen complex has halted work indefinitely on the project.

“The (Mello-Roos) bonds are in default,” Brooks said, adding that the $1.1 million extracted by the school district when the bond was issued has been used for expansion of a high school and construction of two elementary schools.

The school district issued the $27.5-million Mello-Roos bond in December 1989; Executive Life failed 17 months later, in April, 1991.

The school district’s developer partner may be responsible for repaying the $26.4 million of bond debt that remains. The bond is secured by the developer’s raw land--where the Margarita Village senior housing project was never built.

A dispute, however, has erupted between the school district and Buie Corp., the developer of Margarita Village. Buie and its real-estate partners have sued the district. Each side blames the other for the failure to withdraw the $26.4 million before Executive Life went under.

“I’m confident, based on my involvement in this transaction . . . that the district will prevail, but at great cost and expense,” said John E. Brown, bond attorney for the schools.

Robert F. Buie, president of San Diego-based Buie Corp., said he is uncertain if Margarita Village will ever be built. “There are any number of scenarios that can take place,” Buie said. “No one likes to lose 25% of 23 million bucks.”