Guilford County staff is telling the Board of Commissioners to show them the money – but the commissioners are responding with a hearty, “Hold your horses.”
Specifically, Guilford County has $27 million in projects that the county intends to start on in fiscal 2016-2017. That includes repairs to the Old Guilford County Court House, construction of a new Emergency Services maintenance facility and construction of a new animal shelter.
The tug of war going on between county staff and county commissioners is over how and when to raise that money. In a meeting earlier this summer, held to review the agenda for a Thursday, July 14 commissioners meeting, one item that staff had placed on the proposed commissioners agenda would have, if approved, stated the board’s commitment to raising that $27 million using a financial instrument known as “two-thirds bonds,” and it would have given staff the green light to begin the process of raising that money.
That little understood funding method allows local governments in North Carolina to borrow up to two-thirds of the amount of principal that was paid off on general obligation (GO) bond debt in the previous fiscal year – as long as that county or other body hasn’t issued additional debt. Two-thirds bonds give counties the ability to issue debt backed by the full faith and credit of the issuing government – just like voter-approved bonds. However, unlike those more familiar GO bonds, voters don’t get any say in whether to borrow the money or how the funds are used, and they have no chance to reject the projects. The issuing body, in this case Guilford County, can use the proceeds from the two-thirds bonds for any purpose it wants. That’s unlike money raised by voter-approved bonds, which by law must be used for the purpose stated in the bond referendum language on the ballot.
At the agenda meeting in early July, when Chairman of the Guilford County Board of Commissioners Jeff Phillips and Vice Chairman Alan Branson saw that staff had placed the item on the agenda for the Board of Commissioners’ approval, they instructed staff to remove it, saying that Guilford County isn’t ready to fund those projects. Phillips told Guilford County Manager Marty Lawing and other staff in the room that the Board of Commissioners hasn’t decided whether to use two-thirds bonds to finance the projects. And it is not clear, Phillips said, when the county will need that money. Phillips pointed out at the meeting that Guilford County still doesn’t even have a site selected for either the animal shelter or the maintenance facility and now, in late August, that hasn’t changed. The county has been looking for an Emergency Services location for over 10 years and, as for an animal shelter site, that looks like it’s still a long way off as well.
County budget and finance staff, on the other hand, are eager to see the county go ahead and use two-thirds bonds to raise the $27 million money to fund those projects. They say it’s just prudent governmental practice. Also, if the county has to purchase land for the projects, it will need money to do so, they argue.
At that July agenda meeting, Lawing and County Attorney Mark Payne both pointed out that, even if the board approved the proposed motion that had been placed on the preliminary agenda, the matter would have to come back to the board before two-thirds bonds were issued. However, Phillips and Branson still weren’t sold on the move.
Phillips said this week that he isn’t yet convinced the county should use two-thirds bonds and he said the matter is still up in the air.
There is also a ticking clock on the discussion: If Guilford County wants to issue two-thirds bonds, the Finance Department needs to do so before it issues more voter-approved bond debt. Guilford County is going to have to issue more school bonds approved by county voters in 2008, and county finance officials are planning on doing that in early 2017. After that, the county loses the legal right to issue two-thirds bonds during that fiscal year.
Two-thirds bonds are a somewhat shady financial tool because they give the commissioners a right to borrow money with the benefits of ordinary GO bonds while circumventing the need for voter approval. Two-thirds bonds were a favorite tool of the Democratic commissioners when they controlled the Guilford County Board of Commissioners. The Democrats kept going back to that well time and again. For years, they paid off debt one year and borrowed two-thirds of it right back, over and over again. They did so until the county got voter approval in May 2008 for hundreds of millions of dollars for projects with typical GO bonds.
According to Guilford County Cash and Debt Manager Clay Hicks, the last time Guilford County issued two-thirds bonds was in 2007, when Guilford County issued $12.9 million that was used for law enforcement initiatives, water and sewer projects and renovations to the county courthouse in Greensboro and for a social services building in High Point.
One concern with using two-thirds bonds is seeing Guilford County get on that same debt-addicted cycle again where it pays off debt one year and goes right back and takes two-thirds of it back the following year using these types of bonds. That, of course, tremendously slows down debt payment since, as soon as some of the debt is paid back, the county comes in and borrows most of it right back – not unlike a frequent user of a pay-day loan business.
The other thing two-thirds bonds do is extend the payback over a longer period of time. A bank loan for the $27 million would have to be paid back in seven to 10 years, while two-thirds bond debt reaches out 20 or 25 years.
Guilford County Finance Director Reid Baker said he cannot say how much the county would save in interest if it did a two-thirds bond issue rather than got a bank loan, nor will he hazard a guess. Other county officials also would not take a guess, even when asked for a wild guess off the record.
Phillips said he doesn’t want the county to raise the money too soon before it’s needed, and he added that he also doesn’t want Guilford County to commit to a funding source without proper deliberation.
“I don’t want to back us into a corner,” Phillips said.
“I’m uncomfortable borrowing money the voters didn’t approve,” he said, adding, “I’m uncomfortable borrowing money the voters did approve.”
He said there’s time “to see where the pieces fall into place” regarding the county’s planned construction and repair.
“I think it would be premature,” Phillips said of issuing two-thirds bonds for the projects.
Baker also said that, from a finance point of view, it’s prudent to raise the money for an entire project at the start. He said one can always adjust the amount later when exact costs become known.
Guilford County budget and finance officials say the county is committed to the projects and two-thirds bonds are the most affordable way to raise the funds.
Baker said that, as a finance official, he gets uncomfortable if money for a large project is only approved a little at a time. He said that raising the money all at once would be his preference, but he added that it’s certainly the Board of Commissioners’ decision in the end.
“For a project ordinance you should budget the full project – not in a piecemeal fashion,” he said.
He also said that using two-thirds bonds is the most cost effective method.
“It’s the cheapest way,” Baker said. “If you borrow money from a bank, that’s a more costly transaction.”
Kara Millonzi, an associate professor of public law and government with the UNC School of Government – with an expertise in public finance – said it’s very difficult to say how much cheaper two-thirds bond debt would be compared with a simple bank loan.
“There are so many factors that go into cost,” Millonzi said. “In general, two-thirds type bonds are the cheapest form of borrowing from an interest rate perspective.”
She said those lower rates are attributable to the fact that two-thirds bonds are GO bonds backed by the full faith and credit of the issuing government, whereas bank loans are not.
“All things being equal, GO bonds are lower,” she said.
She said GO bonds have a life of 20 to 25 years in most cases while a bank loan for government projects would generally have a shorter time period.
When she was asked if two-thirds bonds were a little tainted due to the fact that they don’t require voter approval yet they commit the county to the same extent voter approved GO bonds do, she replied that two-thirds bonds are a legal funding option allowed to local governments by state law.