Water Board Gave 3 Builders $9.5-Million Break : Taxes: Santa Margarita Co. and two others paid less than half of original assessments. They say it’s homeowners who benefit.

The Santa Margarita Water District’s board of directors last June excused the Santa Margarita Co. and two other South County developers from paying more than $9.5 million in special assessments that the three companies owed to the water agency, records show.

The Santa Margarita firm was originally liable for about $16.4 million in assessments, but ended up paying less than half that amount, according to a review of district records by The Times.

The Santa Margarita Co. saved itself $8.49 million.

“They haven’t done us an $8-million favor,” said Rick Niemann, the company’s chief financial officer. “I think they used prudent judgment.”

Neimann and other Santa Margarita Co. officials said Wednesday that the $8.49 million it saved would help the company keep the property taxes of homeowners in its developments under 2%, and that nobody has benefited more from the water district’s action than these homeowners.

The water district’s finance director, James W. Clark, doesn’t quite see it the same way.

“I don’t like using $8.5 million of district funds in this manner,” said Clark. “This is like a 30-year mortage on your house, and someone paid a year of it for you.”

Reductions in the developers’ special assessments were first recommended to the Santa Margarita district’s board by Michael P. Lord, the assistant general manager suspended last month following reports in The Times that he and his boss, Walter W. (Bill) Knitz, had accepted nearly $60,000 in gifts from bankers, developers and engineering firms, which the two water officials had recommended for multimillion-dollar, no-bid contracts.

But Lord’s recommendations came after representatives of the Santa Margarita Co. contacted water district officials about the wisdom of having so much bond money sitting idle in the district’s investment account. Developers like the Santa Margarita Co. are obligated under agreements with the water district to ensure payment of interest to bondholders, and those payments had been costing the Santa Margarita Co. millions of dollars each year.

But in addition to the interest that had to be paid out to the bondholders, the $150 million the district had raised from bond sales was also producing interest income for the district’s investment account.

Mark Moffitt, the company’s vice president for finance, told The Times that “the company contacted the district with the question being: What can be done, from a legal standpoint. . . . Do we have some alternatives here with regard to the use of the interest that is being earned on the unspent (bond) funds?”

Each side was wrestling with difficult issues brought about by the recession, most notably a huge slowdown in home sales.

Acting on pre-recession projections, the water district had raised more in public bond funds in the late 1980s than was needed to build water and sewer service in South County. “The projections put together for bond sales were outpacing what was actually happening on the ground in home sales,” Moffitt said.

Water districts typically sell bonds two to three years before construction actually begins on new water and sewer facilities.

The value of bonds sold by the water district is primarily based on home sale predictions made by developers.

The Santa Margarita Co. and other home builders signed contracts in the early 1980s agreeing to pay whatever portion of the interest and principal on those bonds that was not collected through property taxes.

In the middle of 1992, the Santa Margarita Water Co. would soon be faced with an $11.7-million shortfall that it would be required to pay, unless something was done.

“We never anticipated it would be that high,” said Moffitt.

Some $4.7 million in property tax assessments had been collected for the water district, but the total amount it needed to cover bond interest and other fees was $16.4 million.

The shortfall was so great in part because the Santa Margarita Co. was already picking up part of the water assessment tab for its home buyers.

Santa Margarita Co. executives said that in order to stay competitive in the price-sensitive housing market they try to keep property taxes below 2%.

Without the company subsidy, home buyers would be paying well above that figure.

So by mid-1992, the water district had more in public bond proceeds than it really needed for the next two to three years and the Santa Margarita Co. was faced with paying a whole lot of interest on those bonds.

Company spokesman Diane Gaynor said Moffitt and chief financial officer Rick Niemann first approached Lord about the problem. Lord, the district’s assistant general manager since 1977, reported receiving $775 in meals from the Santa Margarita Co. or its subsidiaries since 1988.

Ordinarily, a water district with an excess of construction funds would simply buy back early the bonds it had issued.

But in Santa Margarita’s case, the bonds could not be called back for 10 years. And the Santa Margarita Co. had signed a contract saying it would make up any shortfalls.

So, records show, Lord entertained the possibility of using the interest the district earns on its $150-million investment portfolio--sometimes called the construction fund--in order to offset developers’ shortfalls.

Lord then requested that the board’s legal counsel, Fritz R. Stradling, render an opinion as to whether the payments could be made legally.

In February, 1992, Stradling ruled that the construction fund interest could be used to pay off interest accrued on the bonds but could not be utilized to repay any bond’s principal.

Lord first brought the proposal to the water district’s finance committee meeting in May of 1992.

Knitz, Lord and the water district’s board of directors comprise the agency’s finance committee.

Board Chairman Don B. Schone recommended in June that Lord’s proposal be approved by the full board and Lord seconded the motion. It was approved unanimously.

Schone said Wednesday that the board had been given a legal opinion allowing it to excuse developers from paying interest on the bonds but “that opinion is being re-reviewed for completeness.”

He declined further comment.

Two other developers--the Coto de Caza Development Corp. and Fieldstone Trabuco Partners--also received breaks on their special assessments, though not nearly as much as the Santa Margarita Co.

Coto de Caza would have had to pay nearly $2 million had it not been excused from $650,714 in assessments. Fieldstone had been assessed $1.2 million and was excused from paying $462,836.

Representatives of those companies could not be reached for comment.

“I think what came out of (the water district’s action) was an equitable solution to the homeowner, to the taxpayer and ourselves,” said Gaynor.