Commission discusses financing options for County transfer station

The Marion County Commission reviewed financing options for transfer station upgrades ranging from general obligation bonds to sales tax and ways that involve a lease finance arrangements at the July 22 meeting.

David Arteberry, senior vice-president of George K. Baum and Co., based in Kansas City, Mo., provided the commissioners with a list of six possible options to consider in financing about $1.5 million for the transfer station project.

“This list has options for counties to finance transfer stations,” Arteberry said. “And, there are a variety of ways to issue debt or some sort of leasing of the transfer station.”

One question he asked the commission was that if they were to finance the transfer station, how would they want it paid back?

Arteberry said some of the options in paying back the debt could come from either transfer station revenues, property taxes through the general fund or use sales tax.

Commissioner Randy Dallke said he believed sales tax, when it was used for building the new jail, was a good choice. But, he said he’s heard the other two commissioners aren’t in favor of it.

“I loved our (sales tax) plan,” he said.

“It worked great for our county, and it was over and done with before the projected date. And, I still would vote for the sales tax.”

Examining sales tax options

Arteberry said: “If the county wanted to have general obligation bonds, it would require an election, and if successful, then full faith and credit obligation bonds could be issued for the project.”

GOBs are the lowest cost-method financing the county would have and would require an election if the amount of bonds the county plans to issue is over $300,000, he said. However, there is a restriction in the statute that says the county can’t issue debt if it’s more than 3 percent of the assessed valuation.

“I don’t think in this case that would be a problem,” Arteberry said. “If you were to use this option, the county could use any kind of tipping fees to help pay that debt, but ultimately those bonds are backed by the county’s (unconditional guarantee).”

In other words, if the tipping fees weren’t sufficient, the county would have to levy property taxes or take money from other parts of the budget to make sure those bonds get paid, he said.

The interest rate on these types of bonds, if they were sold today, would be about 2 3/4 percent, Arteberry noted.

One of the options, that was the same financing used in building the jail, required the county receiving special legislation in Topeka to implement a special sales tax, which is a sales tax the county keeps all of, he said.

“The county used this type of sales tax to pay back bonds issued to build the jail, and this same type of financing could be done with the transfer station,” he said. “It would require the special legislation in Topeka and an election to carry out this sales tax (option).”

Tina Spencer, the county clerk, said the special legislation is already in place.

“If the county implemented this option for a $1.5 million project, the sales tax would be about two-tenths of a percent (or 20 percent) and could be paid off in about 10 years,” Arteberry said.

“If we were at 7.5 percent sales tax, then it could raise the sales tax to 7.625 or 7.7 percent,” he said. “In this case, if the sales tax were insufficient to pay the bonds, then the county would have to levy property taxes, but that didn’t happen with the jail. And, in fact, the tax was more than sufficient to pay the bonds off quicker.”

Similar to the aforementioned option, which also uses sales tax, the major difference is that in this scenario, the county’s general obligation pledge is removed from the equation, he explained.

“So, in this case, all the county is doing is pledging the sales tax revenue to pay off the bonds, but the drawback in doing that is the bonds don’t sell at a lower interest rate because purchasers of these bonds like to see the “full faith and credit” by the county,” Arteberry said.

The bonds wouldn’t pay off as quickly either because the interest rate is higher and the payments on the bonds would be higher, he added.

Variations of lease financing as options

Instead of using general obligation bonds or bonds backed by sales tax, another answer could be lease financing for the building, Arteberry said.

“This lease could come in different forms, (as explained in one of the options) which would be a private placement lease,” he said.

Simply stated, one of those options would involve the county finding a local bank interested in doing the financing, he explained. The county would enter into a lease/purchase agreement with the bank providing the funds to construct the facility.

“The bank would then own the facility and lease it to the county,” he said. “Once the county is done making the lease payments, then the facility becomes the county’s building.”

Although a simplified version, Arteberry added that prior to paying off the lease, if the county fails to make the lease payment for whatever reason, the bank could take the building over and do what it needed to recoup its investment.

No election would be needed using the lease/purchase option, but a “notice of protest” period would be required for possibly 60 days, he said. But, if a protest petition were filed during that time, then the county would face the decision as to whether to have an election to do the project.

“Another version of a lease,” he said, “is called ‘certificates of participation’ which is basically bonds backed by a lease, but instead of the financing coming from a local bank or another bank in Kansas, the county would issue bonds and the proceeds from the bonds would build the facility.”

Using that option, the county would make lease payments to a trustee bank until those lease bonds are paid off, he said.

The most complicated of the two lease options is the public building commission, he said.

“If the county wanted to, it could create an entirely separate entity—a public building commission—and it could issue bonds and the proceeds from that bond issue could be used to build the transfer station,” Arteberry said.

“The county would then enter into a public building commission to lease the transfer station from the building commission,” he said.“So, the lease payments the county would make to the building commission would then go to make the payments due on the bonds.”

It seems convoluted, Arteberry said, but the main benefit of that structure is that the county’s commitment to making those lease payments is absolute and unconditional for as long as the lease is outstanding.

“In other words, with these other leases, the county would have the right (if the county wanted to) in any year walk away from the lease and turn the building back over to the bank,” he said.“But, with the public building commission, the county’s obligation to make the lease payments to the building commission is almost like a general obligation pledge—the county doesn’t have the ability to walk away from it.

“It would mean the county is in default, and the county could be sued.”

The difference is that the extra commitment of not walking away from the lease is viewed by investors as a very strong pledge, similar to the pledge of general obligation bonds, he said.

In summary, Arteberry said, one of the options he discussed is a “pure” general obligation bond, two others involved sales tax and the other three dealt with lease financing.

Commissioners talk about options

Dallke said that when the commission discussed at length the public building commission financing option for the new jail, it still required a protest period.

Arteberry asked: “Did the county go through the steps of creating a public building commission?”

Dallke said: “No. We just saw the steps it would take, and never went further.”

In response, Arteberry said that In order for the county to do this type of lease, it would have required creating a public building commission, and in order to do that, the county would then have had to go through the notice and protest period.

Commission chairman Kent Becker asked about sales tax, sales revenue bonds, general obligation bonds, what do you see in the market as far as on a lease and getting a longer term maturity?

“With general obligation bonds, the county could go 20-25 years,” he said.

Becker said: “Normally we have seen shorter terms on lease/purchase agreements.”

“For something of this size, probably 15 years,” Arteberry said.

Becker said he was surprised the lease/purchase agreement would go that long.

“Before pursuing any of these options,” Arteberry said, “I would like to speak with some of the banks that we work with that do this kind of financing. This is a little different than a courthouse, an ambulance or fire truck.”

Arteberry said he wondered if there could be environmental issues with a transfer station, and it could cause banks to “shy away” from it.

Becker said that if he understands what Arteberry is saying is that for this type of project, it might mean going to a more regional bank.

“Doing a general obligation bond issue at $1.5 million, the county can keep its expenses down, but doing a more complicated lease-backed bond issue, the expenses could start piling up on the county,” Arteberry said. “I think if the county wants to do a lease, it would be better to go with the public building commission.”

Novak asked if the county has the option of borrowing from itself and paying it back if funds are available in a certain line item?

Arteberry said, it is an option, but not if it’s draining the county’s fund balances so low to create problems with county operations.

Another concern in repaying is that future commissions wouldn’t necessarily be bound by what the commission today decided on.

“A future commission could say: ‘Oh, we don’t need to do this anymore.’”

Novak said it would save the county a lot of money in interest and fees.

Borrowing money from the county itself

Scot Loyd, Swindoll, Janzen, Hawk and Loyd, and who serves as the county’s budgeting accountant, said if cities have utility funds available, those municipalities might use those funds to borrow from.

“What we were talking about is we have about $4 million in capital improvement fund, so in the general fund setting, they could borrow from that because there is no binding resolution that says that $4 million has to be used for roads,” Loyd said.

With the $4 million, the county could borrow $1 million, and avoid the extra costs associated with interest, and other expenses with the bond options.

However, there has to be some understanding that another commission might change their mind about paying the money back, Arteberry said.

“And, if you want to formalize it, I have seen situations where a city will issue bonds and buy their own bonds,” he said.“When it’s formalized, I think you would have to go to a vote to issue those bonds in the first place.”

Loyd also had another concern he wanted to address with Arteberry present.

“This is something you commissioners might think about, which is that the assessed value has went up significantly to $3.8 million this year and about $4 million last year,” Loyd said.“What we have is a mill levy that will drop because of the assessed value increase and the tax lid won’t eat up that entire drop—so I wanted to wait and hear what (Arteberry) had to say.”

Citing the general obligation bonds with the primary payment made by property taxes, Loyd explained that it would have no tax lid tied to it.

“What we did last year was take part of that extra and put it into a risk management fund (line item) because the tax lid allows the county to do that if there’s any kind of federal or state disasters or even local disasters, to set aside a portion of the tax lid for money because the county isn’t reimbursed by FEMA for nine to 12 months,” Loyd said.

“So, that’s what we did last year—(put in) $189,000,” he said.

“Since the general obligation bonds aren’t tied to the tax lid, the county had the $228,000 that is tax lid money,” he said. “The additional point was that for the county to get up toward the mill levy that is the same as last year, it had to add $189,000 last year to get there.”

The general obligation bonds aren’t part of the tax lid.

So, in other words, Loyd said, the county can add that payment, if it’s wanting to fund (the transfer station) with general obligation bonds, and add that payment to the tax lid, thereby bringing that mill levy up to the same amount, and yet it’s still not going to be quite enough.

Loyd said, with the mill now at $136,000 (new assessed valuation), which would be .6 or .7 mills, then by financing the $1.5 million, noting the county has transfer fees, and if the assessed value would stay the same, the county could use the part over and above to get up to same mill levy and finance whatever bonds because they aren’t tied to the tax lid putting it in one category.

If half of the transfer station project is financed by transfer fees and half by general obligation bonds, and half that payment would be about $50,000—it would be about what the county is missing this year. The county could put the $50,000 in the risk management fund, and the mill levy would stay the same, and the assessed value increase would pay for it.

No guarantee that will happen every year, but say assessed value was flat or down, the county would still have to make the payment, but the mill levy would still go up.

No decisions were made as to finance option, but Spencer asked about the turnaround time which could be crucial should the commission decide to do a bond issue, and the need to have it on the ballot in November to be voted on.