Sunday, May 15, 2011

Montebello Discovers that Pretending Debt Doesn't Exist is Just Like Paying It Off

When we last left the Los Angeles County city of Montebello, things were looking grim. Its debt had been downgraded to junk by the Moody's agency, it was facing an audit by the state controller over its spotty financial reporting, the federal Housing and Urban Development agency was cutting funds to the city, and bankruptcy was looming in the form of an unspecified budget deficit. One of the most pressing concerns was a legally questionable loan of somewhere between $14 million and $19 million that the city took from its own redevelopment agency. Legal issues aside, Montebello had promised to pay back the loan by the end of June, and was facing bond default if it couldn't do so. Well, the city has figured out what to do about part of that loan. And no, it's not paying the loan back.

Unless you're a bond holder.
According to the Pasadena Star Times, Montebello has identified a long-term loan of $13.5 million that it gave to the redevelopment agency back in the 1990s. Originally, the plan was for the agency to repay the city with tax increment dollars from one of its redevelopment areas, in the amount of $1.3 million per year. As of now, the RDA needs to repay $13.5 million on that loan. Well, the new plan approved by the City Council last week will essentially subtract $13.5 million from the debt Montebello owes the RDA, by considering last year's loan a "prepayment". Further, beginning in 2014-15, Montebello will assume payments on the debt service from the loan until 2026, in lieu of the RDA's tax-increment money.

If you're wondering how on earth that can be legal, well, Councilwoman Christina Cortez is with you, and we'll wait to see whether the plan can withstand legal challenges. In the meantime, it only helps Montebello in a strict financial-accounting sense. The city still has a general-fund deficit of around $1.2 million, not counting the $5 million it had to return to HUD last month. It's not clear what it will do about repaying the remaining $3.5 million on the RDA loan by late June. And it's not clear whether many of its financial maneuvers will stand up to legal scrutiny, which Montebello is getting a lot of these days. Stay tuned.


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