Money was on the minds of Blount County commissioners during their monthly agenda meeting Tuesday evening, Feb. 8, at the Blount County Courthouse.
The commissioners forwarded to their regularly scheduled Feb. 17 meeting a recommendation to refinance a $46.6 million balloon payment into a traditional fixed rate bond while keeping two interest rate swaps to hedge the risk of the remaining variable rate debt of $50.5 million.
County Budget Director Steve Jennings said an interest rate swap is where the county agrees to pay a fixed rate in return for a variable rate payment and that transaction, coupled with the underlying variable debt, hedges the risk of that variable interest rate going up. “We’re paying a variable rate and receiving a variable rate while also paying a fixed rate,” he said. “It’s a method to turn a variable rate into a synthetically fixed rate debt.”
The issue with the balloon payment started two years ago when the financial crisis hit in the winter of 2009. There was a variable rate debt backed by Ambac, and they defaulted and couldn’t provide bond insurance, Jennings said. That is why this fixed rate bond was done, he explained.
“There was no liquidity in the market to refinance the debt at that time so this two-year balloon payment was put into place as a bridge to get us through the financial crisis,” he said.
Jennings said the $46.6 million balloon payment was from variable rate local government public improvement bonds. The budget director said $39 million was issued in 2000 for the Burkhart property to build Union Grove Elementary School, Justice Center construction and Blount County Courthouse renovations, renovations to Eagleton Middle School and Walland School and for the Oliver property to build Mary Blount Elementary. The $10 million bond taken out in 2002 was for Fairview renovations.
Jennings said $46.6 million of the $49 million had to be refinanced two years ago, resulting in the balloon payment in June. The remaining $4.3 million has an amortization through 2019, for a total $4.3 million, he said.
The unhedged $50 million variable debt swaps was created as a refunding bond in August of 2008. It was a refinancing of bonds for school construction, Jenkins said.
During the meeting Tuesday evening, Jennings reminded the commissioners the $46.6 million balloon payment is due on June 1. “I’m doing a complete analysis of our funding alternatives, and I was hoping you would decide in February which alternative you would want so we can start the process of repaying the debt,” he said. “I’m asking the commission for approval of my recommendation. It is important to make this decision in February. It takes time to get this done. Interest rates are starting to move. I’d like to get this money borrowed before interest rates go up.”
The budget director said the current market is still very good for converting variable debt to fixed rate debt. “Since we have a balloon payment due, it’s a good time to consider making it a fixed rate debt,” he said.
But Jennings said the cost to eliminate the swaps associated with the balloon payment would be an additional $5.2 million paid to the Deutsche Bank, who is the counter-partner in the Swap agreement.
Jennings presented three alternatives. The first would refinance the $46 million balloon payment, the $2 million in library debt and keep the two swaps for $50 million at a variable rate. It would avoid a $5 million pay off and require 50 cents of the tax rate. The second and third alternatives together would refinance the $46 million balloon payment and the library debt to fixed rate bonds and turn the two swaps for $50 million in variable rate bonds to all fixed rate bonds. It would require 56 cents of the tax rate.
Over time, the first alternative is $15 million cheaper, he said.
“Economic analysis says it is a clearly better option to keep the swaps - variable rate bonds at 2 or 3 percent,” he said. “It’s the commission’s decision. If you go with the less risky course, it will be with a higher cost, assuming all things being equal.
“I can only do this analysis with conditions as they are today. There is more risk with my recommendation, but I think it is manageable risk, and it is less costly to taxpayer,” he said.
Commission Chair Kenneth Melton made the motion that the commissioners forward Jennings’ presentation onto the commission meeting with a recommendation the commissioners choose the first alternative. “I don’t like the idea of having to pay $5.2 million to pay this off,” he said. “I recommend alternative one. I think we can work out of this.”
Other members of the Budget committee agreed. Mayor Ed Mitchell said it was the wise course. The mayor worked with a hand-picked committee of individuals in the community who advised him to take alternative one. “Each one agreed with option one, and I would have to agree option one is what I would go with,” the Mayor said.
Commissioner Jim Folts didn’t like the idea of going with anything but fixed rate debt, and he said swaps are a synthetically fixed rate debt. “Synthetically fixed rate is a Wall Street lie. We’re still exposed to changes in the rate,” he said. “If you choose alternative A, you’re still exposed.”
The measure passed on to the full commission for a vote by a margin of 15-3. Commissioners Mark Hasty, Jim Folts and Holden Lail dissented, and commissioners Monika Murrell, Brad Harrison and Steve Samples were absent.