L.A. County diverts Marina del Rey revenue to balance budget for year.

In order to pay its bills through June 30, Los Angeles County last week diverted future revenues from its largest cash-producing asset -- Marina del Rey -- in a byzantine bond financing, said county officials.

Using a sometimes controversial municipal financing tool called a "certificate of participation," L.A. County on May 25 sold the 800 acres known as Marina del Rey to a county-controlled nonprofit corporation, according to senior deputy county counsel Mark Saladino. It then immediately repurchased it, with payments to be made over the next 14 years.

"We needed this to cover a cash deficit. The financing is secured by revenues to the county produced by the marina," said Sharon Yonashiro, director of public finance for Los Angeles County. "The marina does not leave county control."

With the complicated deal, the county leverages commercial lease revenues it receives from the marina to raise cash, without losing control of the marina or mortgaging the land, officials said.

On May 25, the non-profit corporation -- called the Los Angeles County Capital Asset Leasing Corp. -- sold to public investors $133 million of tax-exempt certificates backed by payments expected from the county during the next 14 years. An additional $55 million of certificates were placed with special county funds.

For the next 14 years, the county will redirect expected marina commercial lease revenues from the county's general fund into a special fund in order to make installment payments of $14.8 million each year to the non-profit corporation. That revenue stream will pay off the certificates, according to John Edmisten, senior county finance analyst.

"We wanted to utilize the marina revenue stream to access the capital markets," said Edmisten.

Under state law, certificates of participation allow the public to purchase "participation" in a stream of lease payments, installment payments or loan payments relating to the purchase or construction of land, buildings or equipment.

Edmisten said investors who purchased the certificates have no claim on the marina property, only on the revenues from the commercial leases. If the marina revenues decline due to a continued recession, investors cannot look to other county funds for repayment, county officials said.

The financing is the result of action taken by the county Board of Supervisors when adopting the budget for fiscal 1992-93, which ends June 30. At that time, the county approved a certificate financing to cover a projected $200 million cash shortfall as part of former Chief Administrative Officer Richard Dixon's so-called "soft landing proposal," according to Yonashiro.

However, a publisher of a bond investment newsletter questioned whether the financing was good public policy.

"It's certainly not good government to mortgage an existing facility to pay a budget shortfall," said Zane B. Mann, publisher of the California Municipal Bond Advisor. "There's nothing to be admired about this kind of administration. It's bad business sense."

Under the Marina del Rey certificate financing, payments by the county are made with revenues it continues to receive from the marina leases. Starting July 1, the county will transfer all revenues from the marina to a newly created marina fund. Only revenues from this fund will be used to pay off the certificate issue, which is not considered debt under California law, according to information released to investors.

"The reason we entered into such a byzantine sale, buy-back financing is because of state and local laws," said Saladino, deputy county counsel.

The commercial lease holders have constructed at least 6,000 boat slips, more than 5,300 rental apartment units, 600 luxury condominiums and 6 hotels with a total of 1,000 rooms in Marina del Rey.

The total rent paid to the county from the ground leases is based on a percentage of gross receipts collected by the lessees, from such things as restaurants, hotels and boat slips.

Because the total rent is based on a percentage of receipts, the risk involved in such a certificate financing is that if the local recession continues, it will hammer collection revenues from hotels and restaurants, and, as a result, the total rent due to the county.

"The risk to investors is that the recession would be so deep it would impact revenues from the marina," said Yonashiro.

The certificate issue was sold unrated and uninsured with a final interest rate to investors of 6.58 percent.

"They came to us for a rating, but we just couldn't meet their aggressive timetable," said Chris Irwin, a director with Standard & Poor's Corp., a rating agency.

Because the county is short an estimated $160 million to operate until June 30, the end of its fiscal year, officials needed to sell the complicated financing quickly to get the cash in place by year's end.

In 1991, California's counties, cities and special districts sold $5.1 billion of certificates of participation, but by 1992 that number had dropped to $4.3 billion, according to the state California Debt Advisory Commission.

The safety of certificates of participation came under fire last year after the Richmond Unified School District in Northern California elected to stop payments to investors on certificates it had already sold. Recently a judge ordered Richmond to continue making the payments, easing many investor fears that other entities would stop making such payments.

However, Mann questioned L.A. County's use of the COPs secured by Marina revenues to pay county operating expenses.

"In truth, COPs were supposed to be used when you wanted to build a new school," he said. "You're not supposed to take something you already own and put a hook in it."

Lehman Brothers, a New York-based brokerage firm, was the underwriter on the financing and Jones, Day, Reavis & Pogue were the lawyers on the deal.