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HomeMy WebLinkAboutAgenda - 10-06-2009 - 5aORANGE COUNTY BOARD OF COMMISSIONERS ACTION AGENDA ITEM ABSTRACT Meeting Date: October 6, 2009 Action Agenda Item No. 5- Q SUBJECT: Public Hearing on the Issuance of Up to $4.6 Million of Qualified School Construction Bonds for the Carrboro Hi h School Arts Win DEPARTMENT: Financial Services Department PUBLIC HEARING: (Y/N) Yes ATTACHMENT(S): INFORMATION CONTACT: Gary Humphreys 919-245-2453 Bob Jessup 919-933-9891 PURPOSE: To provide an update on the status of the proposed issuance of up to $4.6 million of Qualified School Construction Bonds for the Carrboro High School Arts Wing and to conduct a public hearing to receive public input. BACKGROUND: At the September 15, 2009 meeting the Board of County Commissioners approved proceeding with the preliminary steps necessary to seek Qualified School Construction Bond (QSCB) financing for the Carrboro High School Cultural Arts Wing in an amount not to exceed $4.6 million. The Board authorized setting a public hearing on the proposed financing for the October 6, 2009 Board Meeting. The public hearing was advertised in the Chapel Hill Herald on September 23, 2009. Chapel Hill Carrboro City Schools (CHCCS) received $1.9 million for the Arts Wing project from the State of North Carolina's 2009 QSCB allocation. CHCCS received notification on September 17, 2009 from the Department of Public Instruction (DPI) that it had been awarded additional QSCB authority for the project during the second round of awards. The second round addressed the unused first round 2009 QSCB program allocation. This additional award brings the total QSCB authority for the project to $4,136,434. The project cost estimate is $4,577,300. Staff has had several discussions with Local Government Commission (LGC) staff regarding the proposed QSCB financing. The LGC will not approve the QSCB financing since full funding is not currently in place for the entire project. In order to go forward with the QSCB financing in 2009, a source of funding for the additional $441,000 will need to be identified. CHCSS staff has agreed to ask the CHCCS Board of Education to make available $441,000 from the system's pay as you go funding from the County, if necessary, to complete the project. It should be noted that Orange County Schools (OCS) applied for QSCB to finance an auditorium project at Stanford Middle School. The OCS system received an allocation of $1.5 2 million from the first round of 2009 QSCB financing, which is insufficient to complete project. The initial QSCB application for that project. was for $4.5 million. Since that time Orange County Schools has indicated the project could be built for approximately $3.0 million if necessary. The State's unused 2009 QSCB allocations will roll forward to 2010 and DPI will reallocate these amounts along with the 2010 QSCB awards. There is conflicting information as to whether school systems which had approved project allocations for 2009 that were not used will be reallocated those same amounts along with an additional 2010 allocation. If the 2009 QSCB amounts made available to the school systems are carried forward and a similar amount is allocated in 2010, most of the funding needed for the OCS auditorium project would be in place. QSCB is a new financing program in which the lender receives tax credits based on a percentage of the amount loaned in lieu of an interest payment. The intent of the program is that the borrower will pay a 0% interest rate on the QSCB financing. At the current time lenders for these bonds are extremely limited as stated in the September 15, 2009 BOCC meeting materials. Since that date BB&T has made a decision not to enter the QSCB market. Guggenheim Partners is currently the only active lender based on staff's information. Staff has briefly discussed the proposed financing with Guggenheim. Guggenheim requires the issuer to prepare an official statement and obtain bond ratings before it will consider the financing. The cost of obtaining ratings will add approximately $25-35,000 to the cost of the financing. There will also be Bond Counsel expenses and potentially Underwriters Counsel expense. Issuance costs would be approximately $40-80,000 which is a significant cost relative to the amount of the financing. The tax credit rates issued by the US Treasury have fallen from the 7.0-7.3% range during the first half of 2009 to a 6.1-6.3% range in the last two months. Guggenheim requires a 7.0% or higher tax credit in order to sustain a QSCB financing at 0% interest. In order for a QSCB financing to be acceptable to Guggenheim for an issuer with a credit rating similar to Orange County's, a supplemental interest coupon of 1.25-1.5% would be necessary. The size of the County's issue is small but Guggenheim Partners has indicated it would consider buying an issue of this size. The approximate annual payment fora $4.136 million/15 year financing loan with a supplemental coupon rate of 1.5% would be $310,000 per year with a net interest cost of approximately $513,500 over the life of the loan. Both school systems will receive additional awards from the State's 2010 allocation of QSCB funds. How the Department of Public Instruction will address any outstanding 2009 QSCB allocation as well as the amount of the 2010 allocations is uncertain at this time. There has been some indication that DPI will consider carrying over 2009 amounts for school districts with projects. LGC staff has suggested that Orange County seriously consider the option of letting the existing allocations roll-over to 2010 and combine the entire amount allocated to both school systems under the QSCB program into one issuance. The reasoning is that the issuance costs and time involved in dealing with one large issue would not be much different than would be involved with doing each of the smaller issues. The LGC along with some financial advisors believe that there will also be more lenders entering the market, bringing about a more competitive lending environment which could lower rates for the supplemental coupon. Therefore, there would be a savings in time and borrowing costs by waiting until 2010 and combining the issues. The advantages to deferring issuance of QSCB financing until next year are: 1) The savings in issuance costs and time by doing one QSCB issuance; 2) Tax Credit rates may go back up reducing or eliminating the interest cost; and 3) Additional lenders may enter the QSCB market making a more competitive environment. • This should reduce supplemental coupon rates. • Banks (i.e. BB&T) may not require bond ratings or official statements. The disadvantages to deferring the issuance of the QSCB financing until next year are: 1) The project would be delayed by at least 9 months; 2) Construction costs could increase; and 3) There is no guarantee that the unused 2009 QSCB authorization awarded to a school district would be rolled forward and added to a 2010 allocation. An idea to be considered for use of the CHCCS QSCB authorization provided in 2010 is to use it as part of the financing for the construction of Elementary #11. The most recent plan presented to the Board for funding Elementary #11 is to issue bonds toward the end of calendar year 2010 or in early 2011 with the initial debt service falling in FY 2011-12. This timeframe will allow a 2010 QSCB financing for Elementary #11 to be linked with the total financing package for Elementary #11. Staff plans to continue to move forward with steps to secure QSCB financing in 2009 for the Carrboro High School Arts Wing project. FINANCIAL IMPACT: There is no financial impact related to this action. However there will be a financial impact as noted above with authorization to proceed with the issuance of bonds. RECOMMENDATION(S): The Interim Manager recommends that the Board: 1) Open the public hearing and receive comments from the public; 2) Close the public hearing; and 3) Offer direction to staff on the issuance of Qualified School Construction Bonds.