Southern Utah News Articles
Top Stories for October 7, 2009
County Bond Counsel Johnson provides information on Public Safety Building financing
The September 28 Kane County Commission hearing on the proposed new public safety facility to be built at Kaneplex was well attended. The facility will operate a 200-bed unit, housing county and state inmates. It is hoped state monies for contracted state inmates, will provide funds for taking care of local needs.
Bond Counsel Eric Johnson provided an explanatory handout that said the following; (highlighting main issues):
In every instance, the Board of County Commissioners has followed a course that would not need to increase taxes. The best option is to construct a facility large enough to meet current uses and future projected needs containing 200 beds. The estimated cost of construction is about $15,000,000.
Kane County obtained a loan commitment for the public safety facility from the Utah Community Impact Board for a loan of $7,500,000 bearing 2.5% interest for 30 years. Because of the interest rate, a longer loan is more desirable. Kane County has since made application to a federal funding agency, the USDA, for the balance of the funding.
If the application is approved, the county will finance the jail entirely through its building authority. These bonds would not authorize an increase in property taxes or pledge property in the county as security.
In July, Kane County and its building authority each authorized notice of the intent to issue bonds in a maximum amount of $18,000,000 and called a public hearing held on July 24, 2009.
Public comments were received, These proposed bonds would be issued by the county’s building authority and would include the $7,5000,000 loan from the Utah Community Impact Board as well as a separate loan hopefully from a federal agency, for which application has been made. Based on public comments, the county’s building authority is now authorized to issue these bonds.
Consistent with Utah law, the notices of intent to issue bonds identify the maxim amount that could be borrowed, as well as the maximum interest rate and maximum term of years on such loans. It bears emphasis that the amount interest rate and term that ultimately will need to be borrowed is expected to be and almost always is, less than the maximum’ in the notices.
Thus to finance $15,000,000 in construction, the amount of $16.500,000 must be borrowed to fund the reserve. This reserve fund is then used to make the final payments on the loan. In addition, Utah law requires the county to borrow what is know as ‘capitalized interest’, in addition to costs of construction. These monies are for making interest payments during construction. By law, the county can’t make payments from county funds during construction.
Finally, the Board of County Commissioners determined it would be wise to provide for a contingency in the event costs of construction exceed the estimated $15,000,000. They determined a 10% contingency would be wise. The 10% contingency, plus the 10% reserve fund, plus capitalized interest account for the maximum of $18,000,000 mentioned in the notice for August 24 public hearing.
The September 28 public hearing identified the maximum loan amount of $10,500,000. This is because the county’s building authority already has a commitment for $7,500,000 from the Utah Community Impact Fund Board. Together, these add up to the $18,000,000 in the prior notice. The amounts above the expected cost of construction are for the same reasons, mentioned above, except for the capitalized interest. This is merely a contingency in the event it becomes difficult to fund the entire public safety facility through the building authority.
The building authority has already held the required public hearing and may proceed to finance the entire facility, if it can attract the necessary funding.
As noted before, the interest rate on the $7.5 loan from the Community Impact Board is 2.5%. However, the notices provide for a maximum rate much higher. This is because the ultimate source(s) for the additional funds is not certain at this time. Also, it may be several months before an loan commitment is obtained and market foces may cause interest rates to swing.
Accordingly, the county and its building authority set 8.00% as the maximum interest rate in their notices for fixed rate bonds. This is also wise because of the potential of issuing the bonds as Build America Bonds, which attract a higher interest rate because of tax incentives. In the very unlikely event that the county agrees to a variable rate loan, the maximum rate was set at 14% in the notices. It should b e noted that the county has been advised that at present interest rates are rather low and it would be best to secure a fixed rate loan. The additional provision for a variable rate loan is purely a contingency.
Finally the maximum term of the bonds in the notices is 35 years. This is necessary. The Community Impact Board loan is for 30 payments, but no payments are required until the year 2012, Meaning that it may be 33 years from the date the bonds are issued until the final payment. Because of the low interest rate on 2.5% on this loan, the delay in the first payment is desirable. Adding five years in the notice is desirable. Adding five years in the notice to assure the County can benefit from the generosity of the Community Impact Board seemed wise.
Although the professional study recommended a 20 year loan, it did not anticipate a 2.5% interest rate, which makes a longer term advisable. Also, a loan from USDA Rural Development, would also likely be for a term of 30 years, and at an interest rate below market rates.
The Kane County Commission has studied the need and best ways to finance the new public safety facility, without increasing property taxes or pledging property in the county. The commission has taken and continues to pursue steps that will drive down the cost of financing the new facility. The notices calling public hearings provide for reasonable flexibility to do this. It is the intent of the Board of County Commissioners to finance the jail at the lowest reasonable cost possible, both with respect to terms of financing, as well as costs of construction. The second notice and public hearing is entirely to provide for contingencies, in the event the primary plan of funding the public safety facility through the building authority meets with struggles.