Adelanto hires lawyers to recoup $48M in bond losses
October 30, 2011 3:00 PM
Natasha Lindstrom, Staff Writer

ADELANTO • The City Council has hired a team of lawyers in an attempt to recoup $48 million in bond losses its public utilities authority suffered after the bond insurer’s rating plummeted a few years ago.

In 2007, the Adelanto Public Utilities Authority converted a series of outstanding water and sewer project bonds totaling $70.64 million to auction rate securities, insured by Ambac. When Ambac’s rating was downgraded amid turmoil in the financial market, the APUA — along with Ambac’s many municipal clients — saw its bond interest rate soar.

For part of 2008 and all of 2009 the interest rate spiked from some 4 to 12 percent, and city officials said the water district was on the verge of going insolvent. The APUA was then able to lower the rate to 6 percent through refinancing, but it had already racked up the estimated $48 million in interest, penalties and issuance costs.

“We got together to figure out how to get out of the swap deal, what to do, and that’s when we ended up refinancing,” City Manager Jim Hart said. “It took us about a year to get the refinancing done.”

As a condition of the refinancing, the city was required to raise rates on residents for the first time since 2001. The hikes took effect in July 2010, in some case doubling and tripling bills and drawing several hundred outraged citizens to typically nearly empty council meetings.

On Wednesday, the City Council approved an agreement with Fish Haygood Phelps Walmsly Willis & Swanson, LLP and other teams of lawyers to seek to recoup the $48 million in losses. The city is not paying the attorneys any money up front, but the attorneys will collect a fee not to exceed 30 percent of the APUA’s award if they’re successful.

Getting the money back wouldn’t enable the city to lower water rates, City Manager Jim Hart said. The APUA must still fulfill its requirement with the new refinancing deal, and it couldn’t rely on the one-time award to lower its ongoing revenue source. Using one-time funds to stave off raising rates incrementally between 2001 and 2010 was part of the reason the APUA teetered on the brink of going broke.

However, the windfall could provide the city with more capital to spend on utility projects, thereby lowering the magnitude of potential rate increases several years from now, Hart said.

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