Getting Around the Debt Limit

Decoding Municipal Bonds

WINNSBORO – When the members of Fairfield County Council wanted to borrow $24 million last year to finance the costs of designing, acquiring, constructing and equipping various projects (see list of Projects on page 6), they chose a somewhat controversial, albeit legal, method to avoid bumping up against the County’s constitutional debt limit.

While revenue bonds do not need voter approval, they must be secured with a lien on a designated stream of revenue (not taxes) from county-owned revenue-producing entities such as a water plant or toll bridge, which Fairfield County does not have. General obligation bonds must be secured with ad valorem property taxes. Without voter approval, County Council can incur no more general obligation debt than 8 percent of the assessed value of taxable property in the County. For Fairfield County, that constitutional debt limit is currently $4.5 million, far short of the $24 million Council wanted to borrow.

Unable to use either of these methods to borrow so much money, Council turned to an unorthodox financing scheme based on something called Installment Purchase Revenue Bonds (IPRBs.) This complex process of borrowing money involved the County first passing a resolution on March 25, 2013 to create a separate, nonprofit (501 c 3) corporation called Fairfield Facilities Corporation (FFC) that could legally issue $24 million in IPRBs that it, not the County, would use to design, acquire, construct and equip the County’s various projects.

To make this happen, the County entered into various agreements with the FFC. A base lease agreement conveyed ownership of the County’s projects (to be improved) to the FFC. In an agreement between the FFC and Regions Bank (the Trustee for the FFC), the proceeds of the $24 million bonds were deposited with Regions to pay for the improvements to the projects. And a Purchase and Use Agreement between the County and the FFC gave the County use of the projects for the next 30 years and provided for the County to make annual lease payments to the FCC for use of the projects. Those lease payments paid for the principal and interest on the bonds. These annual payments incrementally buy the projects back from the FFC so that, at the end of the 30 years, the County will again own 100 percent of the projects and their improvements.

Howard Duvall, retired Executive Director of the S.C. Municipal Association, put it simply, “In short, the Council set up a non-profit corporation to borrow the money to finance the County’s projects. This allowed the County to finance $24 million of improvements without exceeding its 8 percent debt limit and without having to get the voters’ approval. The County then pays the FFC back for the bond using whatever funds are available each year.”

And the ‘whatever funds’ part becomes the rub.

While general obligation bonds cannot be levied to pay for traditional revenue bonds, one characteristic of IPRBs is that, unlike traditional bonds, they can be paid for with any revenue stream, even a mock revenue stream created by ad valorem taxes. To that end, on April 15, 2013, less than a month after establishing the FFC, which issued the $24 million IRPB, the Fairfield County Council passed Ordinance 614 authorizing a general obligation bond that would create a de facto revenue stream for making annual payments on the $24 million bond.

“The FFC issued the$24 million bonds and then Fairfield County can issue the general obligation bonds one year at a time to make the annual payments,” Duvall explained.

But this plan was not spelled out for Fairfield County voters at Council meetings or in newspaper interviews. In addition, Ordinance 614 did not specify an amount for the bonds to be issued, a date of issuance or the number of bonds authorized by that ordinance. At the same time, at Council meetings and in newspaper interviews, former County Administrator Phil Hinely and members of Council further confused the issue, whether intentionally, inadvertently or negligently, by referring to the ordinance as authorizing the $24 million bond, not a general obligation bond that would be issued to make interest payments on the $24 million bond.

Almost a year later, on Feb. 14, the first general obligation bond authorized by Ordinance 614 was issued in the amount of $769,177.88. Forty thousand dollars of that amount went to the County’s bond counsel, Parker Poe Adams & Bernstein, LLP, for bond issuance fees, and $5,900 went to BB&T (who purchased the bond) for unspecified fees. The remainder was applied to the first interest payment of $744,047 on the $24 million bond. The County will pay an additional $69,674.25 in interest on the new bond over the next seven years for a total payout of $838,852.13. It is not known if the County plans to issue similar general obligation bonds to make additional annual interest payments on the $24 million bond, but the sum of the annual principal and interest payments due in 2019 totals a little less than $4.5 million, which is the amount left on the County’s bonded debt limit. In other words, the County could issue annual general obligation bonds in that amount without asking voters’ permission. According to the payout schedule for the $24 million bond, the larger debt payments start in 2019 when the new property taxes from the second nuclear reactor at the V.C Summer Nuclear Station in Jenkinsville are expected to begin pouring in to cover the payments.

While Fairfield County Interim Administrator Milton Pope has assured The Voice that no new tax will be levied to pay for the $769,177.88 general obligation bond, an official with the State Treasury Department who asked not to be identified said that, in reality, the tax payers are on the hook for not only the $838,852 payout of the $769,177.88 general obligation bond, but they are technically on the hook for the entire $43,200,664 payoff of the $24 million bond.

“If anything should happen that the County did not have the revenue sources it’s planning to meet those debt obligations,” he told The Voice, “the fine print in the $24 million IRPB and the smaller general obligation bond says the County is obligated to levy ad valorem taxes to pay for the debt.”

According to several state officials who were contacted by The Voice but who also asked not to be identified, these nonprofit corporations such as the FFC are shell corporations created solely for the purpose of evading the County’s constitutional debt limit. Explaining how Blythewood’s Town Council created the Blythewood Facilities Corporation (BFC) in 2010 as a way to issue a $5.5 million bond, the Town’s attorney, Jim Meggs recently told Council that the BFC “is a way to get around certain regulations and restrictions.”

While IPRBs have been ruled to be legal by the Supreme Court, primarily because they are issued not by the County but by a separate nonprofit, they have been in the cross hairs of the General Assembly since at least 2006 when the Greenville School District ran up $1 billion in debt by financing school facilities in this manner. The General Assembly put an end to the practice by tightening up loopholes in the law that allowed this kind of high risk financing. In recent years, counties and cities having increasingly favored IPRB financing, which some state officials and legislators say is chicanery. In an attempt to stop counties and cities from financing with IPRBs, S.C. House Representative F. Gregory Delleney Jr. (R-43), Chairman of the House Judiciary Committee, sponsored House Bill 3105 in January 2013, to end IPRB financing, which he calls a rouse. He says the nonprofit corporation is a shell.

“This (financing with IPRBs) is crazy,” Delleney said. “It allows counties and cities to escape a public bond referendum for enormous amounts of borrowing. If the people choose to take out that much debt, OK. But they should be able to vote on a bond referendum of that magnitude. Counties should be subject to the debt cap. The bonded indebtedness cap is intended to keep the tax payers from being left holding the bag.”

Delleney said he had support for his bill from legislators, but was inundated with opposition from county and city governments. The bill, stalled in the House Ways and Means Committee, will likely die there this term. But Delleney said he plans to introduce it again next year.

“Fairfield County did not think up the IPRB scheme,” a State Treasury Department official told The Voice. “It is frequently peddled to counties and towns, particularly smaller ones, by companies that specialize in selling the IPRB product. They provide financial advice and service, and put the transactions together, then go in and say, ‘Tell me what your needs are for the next several years.”

But Duvall said, “Installment purchase revenue bonds cost about twice as much as if they were issued as straight general obligation bonds. And one of the problems with backing payments up so that little interest and principal are paid up front is that you are increasing the cost of issuance by probably half. “

And Delleney asked the big questions – Does the county or town really need the stuff they’re funding with these IPRBs, and do IPRBs make it too easy for them to borrow large sums they could not otherwise borrow without the voters’ consent. Delleney said this kind of financing by counties and cities can ultimately spell trouble for tax payers.

Comments

  1. Wanda Carnes says

    Well folks, looks like county council and the infamous Hinley did it to us again!

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