2 Lawsuits Threaten Marketing of Bonds for Sewers in Malibu

Lawsuits by property owners and a state agency have damaged the marketability of $39 million in bonds for a sewer system in Malibu, raising the prospect that Los Angeles County may sell the certificates as a high-risk offering that would add about $12 million to the project cost, county officials say.

That 31% increase would be passed along to property owners in the new sewer district, officials said. The typical homeowner in the district already faces a $9,900 tax bill for the project.

“The added cost is an appropriate concern for the people who brought the litigation,” Richard Dixon, county chief administrative officer, said in an interview Tuesday.

He said the county would continue to negotiate with the Malibu Township Council, a community group that represents most of the affected property owners, to try to settle the suit the homeowners filed after county approval of the new district in January.

Interest Rate

The Township Council lawsuit, and a second one by the California Coastal Commission, puts the investment of bond purchasers in jeopardy and drives up the interest rate that the sewer district would have to pay on the bonds to make them attractive to buyers, Dixon said.

The sewer bonds would have to pay investors 12%, the maximum allowed by law; “otherwise they’re unsaleable,” Dixon said underwriters have told the county.

“Clearly, any litigation concerns purchasers of the security,” he said, “The more the risk, the more the reward they’re going to require.”

The sewer system’s current $39-million bond requirement--out of a $43-million total price tag--was calculated at a 9% interest rate, officials said. Each additional percentage point on the interest rate would add about $4 million to the cost, Dixon estimated.

In its lawsuit, the Township Council alleges that the county sewer plan burdens homeowners along a seven-mile coastal strip with an unfair share of fees, while businesses and large landowners in the Malibu Civic Center area will reap a disproportionate share of the benefit from the sewer.

No State Approval

The Coastal Commission is challenging the legitimacy of the sewer district, maintaining that state approval was required but not obtained by the county.

Lawyers for both the Township Council and the Coastal Commission are scheduled to argue their cases at a Superior Court hearing June 2.

But Dixon said it is his “educated guess” that the county might attempt to market the high-risk sewer bonds in April if there is no movement toward settling the suits and if nationwide interest rates on bonds continue to increase.

Under such circumstances, he would probably recommend the bond sale, Dixon said. Another vote of the Board of Supervisors would be required to sell more than the $39 million in sewer bonds, officials said.

Township Council representatives said an April sale would be premature and an abuse of power by the county.

“It seems definitely outrageous that they would try to raise funds through this junk-bond process,” said Larry Wan, president of the Township Council. “It is beyond our comprehension that a government would be so irresponsible.”

Wan said the possibility of a high-interest bond sale has been raised by the county during lawsuit negotiations. The issue is being used, he said, as a bargaining chip to try to divide property owners and persuade them to settle their case.

The county is eager to sell the bonds so work on the sewer will be under way before Malibu residents vote on cityhood, possibly in November, he said.

“There’s absolutely no need for the county to rush to pay a premium (interest rate) when all they have to do is wait for the suit to be resolved,” said Wan, promising that the Township Council would go to court to try to block a high-interest bond sale.

Not all Malibu property owners agree with the Township Council.

‘Fighting Improvement’

“I do believe that they are fighting against the inevitable for our community,” said Andrew K. Benton, vice president for administration at Pepperdine University, one of Malibu’s largest landowners.

“I think they are fighting against an improvement that would be beneficial,” he said. “And I regret the fact that their decision to fight appears to affect the community financially.”

Benton added, however, that Pepperdine would not be affected by the added costs of a high-interest bond sale, since it anticipated the Township Council’s lawsuit and paid its $3-million sewer assessment in cash. In beating a Feb. 16 deadline for cash payments, it also received a 10% reduction in fees, he said.

County officials said they received an additional $1.2 million from other property owners before the deadline.

Dixon said there are strong arguments against waiting for a settlement before marketing the sewer bonds. Construction costs increase almost monthly, and the upward inclination of the nationwide bond market is also a risk, he said.

Studying Alternatives

Still, Dixon said the county would like to avoid the sale of bonds at a rate that would increase costs. And Treasurer-Tax Collector Sandra M. Davis, the county official most involved in analyzing financing options for the sewer, said she is focusing on alternatives within the current $39-million limit.

So far, she said, “we have not structured a deal that I am comfortable with.”

Even if the supervisors were to approve an increase in the bond limit to allow sale of the high-risk bonds, “marketing would be difficult,” Davis said.

In fact, unless the lawsuits are settled, she said, “there is a question as to whether we would be able to go forward with a marketing position at any interest rate.”