Jail Bonds Are Nothing Unusual
A bond is a debt, according to any dictionary. That's one of multiple definitions, including a fetter, an obligation and a reference to the quality of paper.
So take your pick of definitions when it comes to bonds issued by the county, whether for education, a jail or utilities.
Issuance of $50 million in limited obligation bonds is not as rare as critics of a recent action by a majority of the Moore County Board of Commissioners would have us believe.
The board voted 3-2 to issue the bonds with $40 million designated for the public safety complex, including an enlarged jail and facilities for the sheriff's department, emergency medical services, 911 emergency communication system and related agencies. The remaining $10 million will be directed toward major capital improvements in county utilities serving the Pinehurst system.
Critics offered a series of complaints about the split decision. They argued that the new building is too large, too expensive and in the wrong location. The also complained that the bonds were being issued without a vote of the people and that the debt would further burden taxpayers.
Here's some background on that latter issue:
Unlike general obligation bonds, limited obligation bonds do not require a referendum. Limited obligation bonds are also known as revenue bonds.
General obligation bonds are usually issued for major capital projects in the public schools. In Moore County, recent referendums have also included capital improvements at Sandhills Community College. Historically, Moore County voters approve such measures by comfortable margins.
As of June 30, Moore County had a bonded indebtedness of $88.275 million, a figure that includes $69.5 million approved by voters in a 2007 referendum for capital projects for public schools and college.
Interim County Finance Director Caroline Xiong says the $88 million-plus total covers all of the county's outstanding debts, not just those issued for education purposes.
Xiong says the county regularly monitors the financial picture and frequently reissues bonds when interest rates change in a direction beneficial to the county. For example, the education bonds approved in 1998 by the voters and now paid off were reissued a couple of times to take advantage of lower interest rates.
The county's bond rating remains high - A1 by Moody's and A-plus by Standard and Poor's. However, Xiong says the county will reapply for ratings with issuance of the $50 million in bonds.
The bond rating, which was upped shortly after voters approved the 2007 bond issue, is important because it reflects a local government's ability to support debt. The benefit can mean more enthusiastic responses from lenders and lower interest rates.
But just how often have Moore County voters approved bonds for any purpose other than education? Rarely.
Voters approved a $150,000 bond issue in 1921 to build the historic courthouse in Carthage. But recent history shows few such ballot box initiatives.
The Courts Facility, occupied in the late 1970s, was erected through an unusual financing initiative involving establishment of a nonprofit corporation that assumed responsibility for the debt on the county's behalf.
Since then, the county has built several new structures without issuance of general obligation bonds. Among them are the Agriculture Center and the Health Center in the Moore County Office Park. The county later erected a pre-engineered building across the street for the elections board.
Mike Griffin, who was county finance officer at the time, recalls that the county borrowed money in 2000 to acquire the Carriage Oaks complex, primarily for use by the Department of Social Services. Griffin, now finance officer for the Moore County Schools, says the transaction involved a simple loan from a bank, not bonds.
The existing jail was enlarged before the Carriage Oaks acquisition at a cost of $4.7 million. Griffin says the county issued Certificates of Participation to cover the cost of enlarging and renovating the jail at that time.
Certificates of Participation, usually referred to as COPs, differ little from limited obligation bonds in that they represent a loan directly from a bank.
"They're just a straight-out loan, just like a loan on your house," Griffin says.
Griffin adds that such loans as COPs and limited obligation bonds may attract higher interest rates than general obligation bonds, but there are advantages that make up the difference.
He says these "straight-out" loans involve considerably less legal and financial red tape and thus are far less costly to administer than GO bonds.
A referendum is not red tape, but administration of a referendum entails plenty of red tape. It's too late to add a local referendum to the November ballot, when the cost would be little more than the minimum fee to pay for the coding to program the electronic equipment, says Elections Director Glenda Clendenin.
At this point, the county would have to call a special election for a referendum or wait until next year when municipal elections are held. A separate special election could cost as much as $40,000, in contrast to the $300 or $400 fee for the additional coding if the measure were added to a general or primary election ballot.
In opting for nonreferendum bonds, county officials are trying to take advantage of lower interest rates while the economy remains sluggish. From this standpoint, they fear that a delay would add to the risk of higher interest rates and the possibility of less competitive bids
Even school construction projects are not always funded through GO bonds.
In recent years, the county commissioners have approved at least two projects through direct loans from a bank. That's how both West Pine and New Century middle schools were built.
Little Difference in End
What is the difference between limited liability and general obligation bonds, other than the referendum question?
When it comes to paying off the debt, very little. The taxpayers will foot the bill in either case.
In less technical language, one might say that general obligation bonds use the county tax base as collateral. That means that the county can be forced to raise the tax rate to pay off the debt.
As for other types of loans, the county plays a role similar to that of any other borrower, including homeowners. If the homeowner reneges on mortgage payments, the bank can foreclose and take the property.
But what would the bank do with a jail, a school or an agriculture center? In the unlikely event this would happen, the bank would probably simply assume ownership of the property and lease it back to the delinquent borrower.
Moore County, with its relative affluence and high bond rating, usually makes an attractive client for lending establishments.
However, a more important factor in assuming such an obligation is the North Carolina Local Government Commission, a nine-member bastion of financial conservatism housed within the state treasurer's office. The state treasurer chairs the commission, which must approve any major loan before a local government incurs bonded indebtedness.
Further, if a local government becomes too sloppy at bookkeeping, the commission has statutory authority to impound the books and simply take over the financial operations of the recalcitrant county or municipality.
The commission's power is -sufficiently intimidating to encourage most local government officials to knuckle under.
Options are few when it comes to financing local government capital projects. An alternative might be a lease-to-buy contract with the county paying rent long-term to private enterprise. That's another story.
Contact Florence Gilkeson by e-mail at firstname.lastname@example.org.
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