Bell faces $35-million bond debt

The small and cash-strapped city of Bell is on the hook for a $35-million bond debt that voters didn’t approve — and that the city can’t afford to pay off, The Times has learned.

The debt, which Bell took on three years ago to buy land near the 710 Freeway, is more than twice the size of Bell’s annual operating budget. Come November, the city could lose the land to foreclosure. The city’s hope to profit from the purchase fell apart in 2008 after city officials failed to conduct basic environmental reviews.

The looming debt raises new questions about how city affairs were run under Robert Rizzo, who resigned as Bell’s city manager after The Times revealed he was earning nearly $800,000 a year. Rizzo and Mayor Oscar Hernandez defended his salary at the time, saying his management of the city’s finances warranted the high compensation.

“This council has compensated me for the job I’ve done,” Rizzo told The Times then. He did not return phone calls seeking comment for this article.

A spokesman for the European bank that holds the bonds said that the city is behind in its payments on the bond and has acknowledged that “due to budget constraints it cannot comply with its obligations.”

It’s unclear what wider effect the city’s potential default on the bond issue might have on Bell’s finances or services.

The bank may not want to foreclose because the property is now worth less than what Bell paid for it four years ago. Even if the property is foreclosed, the city does not appear to be required to tap its general fund or other sources to make good on the debt. Nor, experts say, would a default on this type of debt, known as a lease-revenue bond, have a significant effect on Bell’s future borrowing power.

But with Bell still “in crisis” because of the salary scandal, interim City Manager Pedro Carrillo said, he has not been able to investigate the potential effect of the failed deal.

“I haven’t looked at it yet. But I better look at it fast,” he said. “I’m sure we’re going to analyze all options. I just don’t know what those are yet.”

The ill-fated deal began to come together in June 2006, when Rizzo, who held the dual posts of city administrator and executive director of the Bell Public Financing Authority, told the City Council that an opportunity was “at hand.”

The idea, he explained, was to float a bond and use the money to buy an unused piece of federal land and lease it to Burlington Northern Santa Fe Railway. The federal government, he said, wanted to sell the property, a forlorn patch of land in an industrial pocket near the 710. Bell could buy it, Rizzo said, and rent it to the railroad, which was interested in expanding its nearby freight distribution operations.

The long-term lease, which would bring in monthly rent of $142,693, would be a money-earner, he wrote in a memo to city leaders. To finance the deal, the city issued $35 million in lease revenue bonds, all bought by Dexia Credit Local, an arm of a European bank.

But despite spending about $25 million for the property and millions more to improve it, Bell never closed the deal with the railroad and apparently has not managed to lease the land to anyone else.

To the City Council members, Rizzo presented the new project as an extension of an existing one in which Bell has leased a slightly smaller parcel of land to the railroad under a similar arrangement. That lease brings in about $210,710 a month, according to city records. It is loosely connected to a massive logistics operation in the area, including the railway’s Hobart rail yard, the busiest in the country in terms of moving cargo containers between trucks and trains.

Three of the four council members who are the target of criticism now because of their big salaries — Hernandez, Vice Mayor Teresa Jacobo and George Mirabal — were also on the council that approved the lease arrangement and bond issue. None of the three returned messages seeking comment on the deal.

Council members gave Rizzo broad authority to negotiate the deal. The bonds did not require voter approval because lease revenue bonds do not obligate the city’s general funds to pay them off.

Much of the $35 million in bond proceeds went to pay off an earlier loan used to buy the land, and part went to prepare the property for the railroad’s tenancy, according to records and interviews. Some $3 million was marked by Rizzo for payments to contractors, a property manager, financial advisors and bond lawyers, although records reviewed by The Times do not spell out who got how much.

Had all gone according to plan, Bell would have refinanced the property, using the railroad lease as collateral, then paid Dexia in time for the bond to mature in November.

But all did not go according to plan.

In October 2007, East Yard Communities for Environmental Justice, a citizens group that tries to blunt the effect of industrial pollution on the 710 corridor, filed suit against the city and the railroad.

East Yard argued that the city had failed to conduct a state environmental review before buying the land and negotiating the lease. Locomotives, diesel trucks and on-site equipment could pose serious health risks for tens of thousands of nearby residents and could increase toxic emissions and storm water discharge, the suit argued.

In July 2008, Los Angeles County Superior Court Judge James C. Chalfant agreed; he scolded Bell officials for ignoring their obligations under the California Environmental Quality Act.

“The whole idea of CEQA is that you are supposed to prepare your environmental review before you enter into the lease with the railroad,” the judge said. The law “is supposed to be followed for a project. They didn’t do anything.”

Chalfant’s ruling spelled the end of the railroad’s involvement in the deal, according to a person familiar with it who spoke on condition of anonymity because he was not authorized to discuss the deal publicly. It didn’t help, that source said, that traffic at the ports of Los Angeles and Long Beach was declining, reducing the need for new intermodal shipping facilities.

Edward W. Lee, Bell’s attorney at the time, did not return phone calls seeking comment.

BNSF lawyer John C. Nolan declined to comment.

Even before the salary scandal broke, Bell had signaled that it was in trouble on the $35-million debt.

Thierry Martiny, a Dexia spokesman, told The Times that the city had informed the bank earlier this year that it could not make payments. In June, Martiny said, the bank and Bell agreed on a “framework for confidential negotiations” to resolve the issue.

But no one, apparently, has been designated to negotiate for the city now that Rizzo is gone.

“Due to the staff turnover recently, such negotiations have not yet commenced,” Martiny said, adding that Dexia is “very concerned” that the city make “a serious attempt to resolve this issue” before Nov. 1.

scott.gold@latimes.com

kim.christensen@latimes.com