STOCKTON, CA - The Delta Water Supply Project recently started pumping water from the Delta and producing clean drinking water for Stockton residents, but the multi-million dollar bonds that brought the project here are now being dubbed as "junk."
Wall Street investment firm, Fitch Ratings, downgraded the water bonds to below investment grade on Wednesday after Stockton's city council voted to plan for a possible bankruptcy filing.
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Business experts and city officials, however, don't view the downgrade as much of a problem.
"The immediate implications for the city aren't really anything," University of the Pacific Business Forecasting Center's Director Jeffrey Michael said. "The bonds are already sold, the city has the money, and the bonds are paid with a restricted fund. The downgrade is a warning for investors that these bonds have some risk."
In California, water bonds are protected, meaning that the city or creditors can't tap into it and it should be protected in bankruptcy court.
"Funds that come in from water rate payers or fees for water services all must go toward water services," city spokesperson Connie Cochran said. "They cannot be used and will not be used to resolve our general fund crisis."
Fitch Ratings' managing director Doug Scott said the firm decided to downgrade the water bonds, knowing they are restricted funds, for two main reasons. Scott said that Union Bank is involved with the bonds and could accelerate the bonds if Stockton doesn't have the money to pay. Secondly, the water revenue should be protected in bankruptcy court, but there is a lot of uncertainty in bankruptcy.
Scott said the firm is concerned that if Stockton files for Chapter 9, the city staff may be reduced and/or the city would be distracted by restructuring that billing, collections and maintenance with the Delta Water Supply Project could wain.
"Creditors understand the circumstances, they understand these are restricted funds," Cochran said. "We continue to work with our creditors."
Michael said that the recent downgrade could be a foreshadowing of more troubles for Stockton.
"The downgrading of the bonds does have implications for the city's borrowing in the future and certainly it's ability to issue more bonds in the future is severely constrained," Michael said.