County acts months before deadline on 2007 bond sale

Friday, December 11, 2009

County commissioners have authorized Roads Superintendent Jerry Williams to spend $270,000 left from a $5 million 2007 bond sale, thereby avoiding a lesser-known requirement when borrowing money from bond buyers.

"We're going to do some oil and chipping," Roads Superintendent Jerry Williams said Thursday, naming roads to be repaired: Cherry Corners Road near Cornersville, Polly Adams Road at Belfast, Blue Creek Road off Lynnville Highway, and Reynolds and Hargrove roads north of Chapel Hill.

There are at least three reasons to repair those roads with the money that's been distributed differently: They need work; the price of oil went from $6,000 for a tanker load about three years ago and now it's $10,000; and "The money needs to be spent by June."

The June deadline is a federal limit on arbitrage, the practice of investing borrowed money to earn more money. Congress doesn't want state and local governments to sell income tax-free bonds with a low interest rate just to boost revenues at the expense of the U.S. Treasury.

Williams traditionally repairs the roads with the greatest need first and the $270,000 increases the $445,000 he got from the 2007 bond sale to $715,000, according to figures from the county's office of accounts and budgets.

In March 2007, the bonds were sold to spend:

* $3,355,000 for school computers, Forrest High School renovation, a house next to that school and land near Chapel Hill Elementary School;

* $1,200,000 for County Courthouse renovation, and;

* $445,000 for road construction and equipment.

The Courthouse renovation faced delays and the work going on now, "Phase 1," is to stop leaks by installing a new roof; restore the stone crown and clock towers; and maintain the clocks.

"Phase 2" of the Courthouse restoration project is now without funding largely because of delays and the federal prohibition against arbitrage after a certain date with tax free bonds. As a result, the commissioners on Nov. 23 deducted $270,000 from the courthouse project and gave it to Williams' department.

The delays would appear to be understandable when two men are consulted about being approached by the county for courthouse restoration.

Several years ago, Michael Emrick, a Nashville architect specializing in historic preservation, did "look at" the Courthouse, but had "a couple of other projects ... and could never get to it... I was over committed," he said Sunday. A variety of things happened... I came down with hepatitis." About the same time, Gerald Sullivan, an engineer in Columbia, was called in, but he "decided not to become involved," Sullivan said Sunday. He says he avoids jobs that are controlled by politicians. One reason is they look for the lowest bid and clients in the private sector pay better.

Freda Terry, director of accounts and budgets for the county, explained arbitrage and some recent history on the subject here.

"Arbitrage is a big thing," Terry said of how local governments may use money borrowed through a bond sale.

Bond sale contracts state why the local government wants to borrow money and there's some flexibility on where it's spent, but the repayment schedule includes a calculation on when unspent bond proceeds can generate additional income through a separate investment strategy.

"You're limited on how much you can make on the issue," Terry said. "You're limited on what you can earn (from investing unspent bond proceeds) relative to the yield," or how much interest the local government is paying on the bond sale."

For example, in 1994, the county sold $15.6 million worth of school construction bonds. Not all of it was spent immediately. What wasn't spent was invested and interest income was earned. That brought the county at least $60,000, according to figures in a report by a Murfreesboro-based accounting firm. Once that money is earned - even if it's at the limit on what can be earned by arbitrage - it can be reinvested and there's no limit on how much can be earned.

"We earned $1.14 million in interest," Terry said of the arbitrage and reinvestment of that revenue. "It was when the market was real good," and the earned interest was placed in securities that were highly rated and with First Tennessee of Memphis.

The revenue boost frightened Terry, she said, because it came close to the deadline and she'd been the director of accounts and budgets for only a few years then.

Earning too much has consequences.

"If you get in trouble with arbitrage ... they could make all your future bonds taxable," Terry said. County and municipal bonds are income tax-free for the buyers who accept a lower yield of income from them in exchange for a revenue stream that isn't subject to income tax payments.

If the county couldn't spend all the $5 million raised by June 1, 2010, the county could be sued by investors who bought the bonds because they would no longer receive interest income that's without any required payment to the Internal Revenue Service, Terry and County Commission Chairman Billy Spivey explained in separate interviews.

Without plans for the second phase of courthouse renovation, the county had to put the $270,000 somewhere where it could be spent by June. As a result, the commissioners unanimously voted on Nov. 23 to reallocate the money to the roads department.

"And we've got some roads that need it bad," Williams said.