The County Council last week unanimously adopted a resolution authorizing a bond sale not to exceed $130 million to finance the construction of a new countywide emergency communications system.
Councilmen were scheduled to take an initial vote on legislation authorizing the issuance of those bonds Tuesday — after the Call went to press.
Officials said last week they planned to issue two types of bonds: tax-exempt special obligation bonds and taxable special obligation bonds designated as Build America Bonds, or BABs.
The bill before the council would authorize the issuance of $63,125,000 in tax-exempt bonds to be paid back from 2012 to 2026, and $58,135,000 in taxable BABs to be paid back from 2026 to 2035 — for a total of $121,260,000.
Traditional tax-exempt bonds typically carry low interest rates because investors who buy them don’t pay taxes on the interest they earn. Taxable bonds, on the other hand, tend to carry higher interest rates because interest earned on them is taxable.
However, under the Build America Bond program, the federal government subsidizes 35 percent of a BAB issuer’s interest payments. As a result, total borrowing costs are lower than those of tax-exempt bonds.
Congress could decide to reduce the BAB subsidy, but the likelihood of that is slim, said Jeff White, a senior vice president of Columbia Capital Management, the county’s financial adviser.
White told councilmen last week that the decision to issue both tax-exempt bonds and to participate in the Build America Bond program was “purely economic.”
“Because the markets are not completely efficient, there’s a point at which it makes more sense for the county to issue tax-exempts and more sense for it to issue taxables with the federal subsidy coming back from the Build America Bond program,” White said.
“As we look at the numbers today, it looks like that magic year is 2026. So I would anticipate when we offer these bonds in the market, bonds maturing in the years 2012 to 2025 will be tax-exempts and bonds maturing from 2026 through the end of the loan in 2035 will be Build America Bonds.
“Again, that’s a purely economic decision,” White added. “What we’re trying to do is maximize the county’s participation under this limited federal subsidy program in order to keep your borrowing costs as low as we possibly can.”
BABs must be issued by Dec. 31, White said.
The county will open competitive bidding for both bond series next Tuesday morning — March 23 — and hopes to issue them by April 15, officials said last week.
As of March 9, the county carried a AA+ credit rating from Standard & Poor’s and an Aa2 rating from Moody’s Investors Service. Those high marks, White predicted, would make the forthcoming bond issue “quite attractive” to investors.
“My general sense is if you get five or six bidders for bonds on a particular day, you’re going to get about the best financing rate,” he said. “I’ll keep my fingers crossed for seven to 10, that would be even better. But I would expect very, very strong interest in these bonds.”
Total project costs for the new emergency communications system are estimated at $115 million.
Officials also anticipate financing capitalized interest, which would provide the county with extra cash to use in the event of cost overruns while the communications system is being constructed, White said.
The county wants the authority to issue up to $130 million in bonds in order to give bidders the flexibility to adjust the way they charge the county interest, White said.
“A bidder could bid a higher amount of bonds but a lower interest rate to pay off those bonds, which would get you to the same place as a lower amount of bonds at a higher interest rate,” White said. “You give the market that flexibility because different investors like different approaches.”
The bond debt will be paid off with revenue from a 0.1-cent sales tax county voters approved as Proposition E-911 last November.
While Prop E-911 proponents projected the sales tax would bring in about $16 million annually, county officials now estimate that amount to be roughly $14 million.
Pending legislation by state Sen. Jim Lembke, R-Lemay, would exempt food purchases from the E-911 sales tax. That would trim the county’s collection by roughly 17 percent, or $2 million, said Garry Earls, the county’s chief operating officer.
“The structure we have here should balance if someone removes food in the future from this tax collection,” Earls said last week. “But we certainly feel comfortable that we have the funding in the tenth of a cent sales tax to retire this debt without having an adverse effect on the county’s general fund.”
Besides exempting food purchases, Lembke’s bill would terminate the E-911 sales tax in five years and bar the county from reauthorizing the tax without voter approval.