Most Mello-Roos districts aren't struggling to keep up

The housing market downturn isn't posing big problems for California's Mello-Roos special property taxing districts, except for several in Stanislaus and Merced counties.

Mello-Roos bonds issued for Merced and Diablo Grande in western Stanislaus County might be in financial trouble, and Patterson bonds have had financing problems in recent years, according to a California Debt and Investment Advisory Commission report.

But state officials were pleasantly surprised that the vast majority of Mello-Roos districts aren't struggling to repay their 1,003 bonds.

A Mello-Roos district -- named for the former legislators who sponsored the law creating them -- issues bonds to pay for things such as roads, streetlights or water service. Homeowners within the district are then taxed to pay the bonds. Districts typically collect more than they need to pay bond debt, with the rest going into reserves.

Only 10 bonds in California have gotten into financial trouble this year, but they include two Merced community facilities districts and four in Diablo Grande's Western Hills Water District.

Mello-Roos districts can, and frequently do, go after delinquent payments by foreclosing on the property, said Stanislaus County Treasurer and Tax Collector Gordon Ford.

"They have a right to pursue payment independently of the tax process," Ford said.

In the case of a home that's already in foreclosure, the Mello-Roos district can seek collection from the mortgage company or bank. But the district can't raise assessments dramatically on homeowners who are current on their taxes to make up for a shortfall, according to the California treasurer's office.

When collections fall short, districts can draw funds from reserves to make payments.

The Merced districts used $192,000 in reserves in October and $105,000 in March to repay debts, the report shows.

Diablo Grande pulled $359,058 from reserves in March to make payments on four of its bonds. But that's not the resort community's only problem: It filed for bankruptcy protection in March, claiming more than $54 million in debts.

A buyer for the 28,500-acre Diablo Grande development is expected to be announced next week by the U.S. Bankruptcy Court. That new owner will take over the water district and start managing bond payments.

Patterson taps reserves

In recent years, Patterson also has dipped into reserves to pay bond debt.

The West Patterson Financing Authority Community Facilities District tapped its reserves 12 times from 2005 to 2007, according to the report.

"Districts with high rates of mortgage foreclosures, such as may be experienced in Merced and Stanislaus counties, will want to monitor the number of draws on reserves," said John Decker, executive director of the California Debt and Investment Advisory Commission.

Foreclosures are a particular problem for Patterson. Prop- erty taxes frequently aren't paid on time by homeowners facing foreclosure or by banks that have taken over houses after mortgage default.

There are about 2,200 homes in the West Patterson district, and about 600 of them were delinquent on Mello-Roos taxes this spring, said Patterson's finance director Margaret Souza. Those fees add about $2,027 to every home's annual property tax payments in Patterson's new neighborhoods.

She recalled how last year about 450 properties were delinquent "but we've gotten all but three or four of them to pay."

If property owners don't pay, the city can foreclose on the home, then sell it to recoup the taxes. "If worse comes to worse, we've got the house," Souza said.

Patterson spent the bond money on an aquatic center, sports park, fire station, city hall and expanding the water treatment plant.

During the mid-1990s, about 50 of California's Mello-Roos districts were drawing on reserves or in default on bond payments. But most districts statewide are in better shape now.

Delinquency could rise

That may not continue.

"Recent events in the home loan market lead some observers to expect a spike in home foreclosures, potentially from 2008 through 2010," the report says. "If this happens, (community facilities districts) might experience a greater number of late payments. Draws on reserves and defaults could increase in 2008-2009 through 2010-2011."

Foreclosures have spiked in Merced and the new-home market there has tanked. That's hurt sales in development such as Bellevue Ranch West, Mor- aga and Bellevue Ranch East, all of which have Mello-Roos districts.

Bellevue Ranch West and Moraga used reserves to pay bond debts this year. At Bellevue Ranch East last month, proceeds from the developer's surety bond were used to pay about $244,000 in past-due Mello-Roos taxes.

"This is one of those fluid situations," said city spokesman Mike Conway, noting that Mer- ced's Mello-Roos districts are solvent. "They are all good until the next payment is due."