Mello-Roos Bonds To Be Investigated : Finance: State commission will hold a hearing on the matter next month.

Mismanagement of Mello-Roos bonds, a heavily used financing tool that has fueled suburban growth, may now threaten California’s credit-worthiness and require tighter controls, according to state Treasurer Kathleen Brown.

Responding in part to a Times Orange County Edition series last week that reported problems with Mello-Roos bonds, Brown said she has decided to call a special hearing next month of the California Debt Advisory Commission to explore possible remedies.

“We have to be able to accommodate growth and development, but we need to get the local government officials mindful of what kinds of bargains they’re getting into,” said Brown, who also heads the commission. “I think it’s essential for the state’s overall credit-worthiness.”

Officials predict that as many as 10 of California’s 226 Mello-Roos municipal bond districts may fall into default within the next two years.

“I want to ensure against abuse at the local level,” Brown said on Friday.

Authorized by a 1982 law bearing the names of two state legislators, Mello-Roos bonds have proved popular with developers and growth-promoting officials in local government.

According to the most recent statistics available from the Debt Advisory Commission, $3.6 billion of Mello-Roos bonds have been issued in the past eight years.

The bonds have been used most extensively in Orange, Riverside and San Bernardino counties, where suburban populations have surged. Mello-Roos bonds are typically repaid over 20 to 30 years by newly arrived home buyers, through their sharply higher property taxes.

The bond proceeds have been used to build curbs, gutters, streets, sewers, schools and fire stations. The bonds are secured ultimately by the value of real estate--either developed parcels or, in other instances, raw land.

Now, the drop in California’s land prices is lowering the value of that collateral.

“My level of concern about Mello-Roos has risen considerably with the worsening of our state’s economy,” Brown said in an interview.

Brown said she will “invite testimony” at next month’s hearing on whether the Legislature should move to enact reforms, perhaps drawing from recommendations made in a report issued in September by the Debt Advisory Commission.

In addition to the dangers to California’s overall credit stature that could be inflicted by Mello-Roos defaults, Brown said she is concerned about tax inequities that critics say unfairly burden new home buyers.

Brown said she now believes that it might be more fair to taxpayers to pay for the curbs, sewers and other facilities that accompany development through repayment of assessment district bonds, instead of Mello-Roos bonds.

A key distinction is that Mello-Roos districts allow developers and officials to tax homeowners at a higher rate than owners of adjoining raw land that may be envisioned for future construction.

Brown said that the old-line assessment districts, authorized by law in the early 1900s, “over time might be a more fair financing technique.”

Brown noted that many Mello-Roos districts are sound financially and not in danger of falling into default. But, she added, she is concerned that existing law may allow local officials too much flexibility in how they handle the bonds.

“It has got to be done conservatively and prudently,” Brown said, noting that the decision-making is now left entirely at the local government level. “Right now, the state has no authority to review these.”

For local government officials, Mello-Roos bonds have been an attractive new source of revenue to accommodate growth. The landmark 1978 state ballot initiative, Proposition 13, restricted officials’ ability to raise taxes by other means.

For developers, Mello-Roos bonds have been attractive for at least two reasons: The bonds provide capital for amenities that might otherwise eat into profit margins; and by controlling the district-by-district taxation formulas, developers have been able to shift a substantial share of the Mello-Roos taxes from themselves to new home buyers. Those taxes repay the bond investors at interest rates that have ranged from 7% to 12%.

In a three-day series, The Times reported that questionable handling of some of the bonds and California’s falling real-estate values threaten to slow the pace of Mello-Roos financing. The series detailed the emerging downsides of Mello-Roos financing, including:

* Homeowners in some Mello-Roos districts must pay even higher taxes if large landholders fo*ld and walk away from their tax obligations.

* Officials in Orange and Riverside counties have consummated $29.7 million of Mello-Roos bond deals with development firms owned by S&Ls; that already were in serious financial trouble, according to public documents.

* Local governments have often allowed developers to select and pay for their own property appraisers--prompting critics to warn that rosy estimations of land values increase the riskiness of those bonds.

* State law requires that buyers of used homes within Mello-Roos districts be informed of the heftier tax burden they are inheriting only in the title report--a technical document not apt to be read by many purchasers.

* Orange County officials are allowing a major development firm, the Mission Viejo Co., to sever its financial obligations to a controversial tollway project by forcing new home buyers in the Aliso Viejo community to repay, with interest, nearly $34 million of Mello-Roos bond proceeds. Those bond proceeds are to be advanced to the tollway agency.

At least one state legislator whose district has been rocked by unsuccessful Mello-Roos financing said Friday that he would favor changing the law.

“If there’s something that could be done to improve the situation, I think that would be very favorable,” said state Sen. William A. Craven, a San Diego County Republican.

Craven’s district encompasses Oceanside, where the city treasury is bailing out a local Mello-Roos district at a cost of $230,000 a year to keep it from defaulting. Craven is a member of the Senate Local Government Committee.