A choice between regular and premium isn’t merely the prerogative of drivers who pump their own gas. It may also be an option for Alamance County in April when it issues the bulk of the $189.6 million in bonds that area voters have approved for the Alamance-Burlington school system and Alamance Community College.
The “premium” which may be available to the county is essentially a markup in the face value of the bonds that the local electorate authorized for ACC and the school system in 2018.
Thanks to historically low interest rates, the county can afford to issue bonds in excess of the sums that area voters approved two and a half years ago, while keeping its debt payments at, or below, the levels it had originally anticipated.
The additional revenue which the county would receive under such an arrangement is known as a “premium,” and its potential value depends on the inclinations of the investors who will bid on the bonds when they’re issued. The county could accept all or some of the premium that the bond market is willing to bear. Or, it could issue the bonds without any premium and reduce its annual debt payments accordingly.
The ability to sell these bonds at a premium would effectively allow the county to get more bang for the bucks that it has already agreed to shell out on behalf of the school system and the community college. But just how much extra mileage it could get from its debt payments won’t become clear until April 20 when the county is slated to issue the school system’s entire $150 million bond package along with nearly $17.6 million of the $39.6 million in bonds that voters have authorized for ACC.
In preparation for this upcoming bond issue, the county’s board of commissioners was briefed on the various options that may be in store for the county when its members convened their latest regularly-scheduled meeting on Monday.
During this briefing, Ted Cole, a financial consultant with the firm Davenport & Company, told the commissioners that they’ll ultimately have to decide whether to sell the bonds at a premium prior to the actual date of the bond issue. Cole urged the commissioners not to rule out a premium entirely, which he said could discourage potential investors from bidding on Alamance County’s bonds. He nevertheless advised them to set an upper limit on the proposed markup based on the additional revenue they want to obtain for ACC and the schools.
“We’re likely to get a premium,” Cole went on to assure the commissioners. “The question will become for you all, how much money do you want to walk away with when the bonds close.”
Cole told the commissioners that, in all likelihood, the bond market will proffer a substantial amount of additional revenue if the county is willing to sell the bonds for more than their face value. He speculated that, based on current interest rates, the school system’s $150 million bond issue could reap an extra $20 million to $25 million in revenue, while he predicted a premium of $2.5 million to $2.8 million on ACC’s initial bond issue of $17.5 million.
Cole added that the county can structure the bidding parameters to nudge the final value of the bonds to whatever level the commissioners set in advance. He went on to urge the county’s governing board to finalize this figure by their next meeting on April 5 in order to give him and his colleagues enough lead time to prepare for the bond issue on April 20.
“Make no mistake,” the consultant added, “if you take this premium, it’s not free money, you’re paying it back. Your annual payments are going to be higher [than they would be at the face value of the bonds]…You’re getting an extra $24 million [in the school system’s case] that’s got to be baked into the total debt service payments on an annual basis.”
Cole nevertheless stressed that there is room for this additional debt within the county’s previously-calculated debt payments, which are based on a 5-percent interest rate that’s well in excess of anything the bond market is currently offering. He added that, in 2019, a previous board of commissioners earmarked 7.04 cents of an 8-cent property tax hike to pay back the county’s bond debt at the presumed 5-percent rate.
Cole told the commissioners that the proceeds from this tax increase are sufficient to cover any premium that the bond market is likely to bear. He added, however, that the commissioners could limit the size of the markup in order to increase the “cushion” that the two-year-old tax increase would otherwise give them.
In response to Cole’s recommendation, Steve Carter, the vice chairman of Alamance County’s commissioners, asked the county’s staff to calculate the amount that could be trimmed from the county’s property tax rate thanks to Cole’s proposed cushion. In the meantime, other members of the county’s governing board saw a potential advantage to the additional revenue that a premium could generate.
The opportunity to raise more money at the current interest rates seemed particularly appealing to commissioner Bill Lashley, who works as a commodities trader by day.
“Normally, I would not take the premium,” Lashley conceded. “But in the scenario that he’s given, to me, it’s almost incumbent that we do…We’re not going to get a market like this one.”
Lashley went on to suggest that the county issue the remainder of ACC’s bonds next month in order to take full advantage of the existing interest rates. The commissioner’s proposal was tut-tutted by the county’s administrators and their counterparts with the community college, who insisted that their remaining projects are simply not far enough along for state regulators to allow them to be lumped into next month’s bond issue. In particular, Matt Banko, the college’s finance director, noted that ACC has spent a long time haggling over a lease agreement with Martin Marietta Materials that’s necessary to proceed with the bond issue for a proposed $10.4 million training center for the county’s emergency services.
“We’re looking at another year or two before we have signed bids for that project,” Banko went on to inform the commissioners.
The prospect of some additional bond revenue was nevertheless welcomed by both the community college’s higher ups and the top brass at the Alamance-Burlington school system.
ACC’s president Algie Gatewood acknowledged that the college can certainly use the proposed premium for various bond-subsidized projects such as a biotechnology center that slated to be built with the revenue from ACC’s initial $17.5 million bond issue.
“If there is a premium, we could certainly use it for equipping the building,” Gatewood told the commissioners.
Meanwhile, Todd Thorpe, an assistant superintendent with the Alamance-Burlington school system, alluded to a laundry list of maintenance projects that he said could be funded with the premium’s proceeds.
“We do have things that we could possibility talk about spending that money on,” he added, “that would be a great investment for our kids, our teachers, and our school buildings.”
Thorpe went on to assure the commissioners that he has roughly $50 million in “immediate needs” that he offered to pass along to the county’s governing board. The commissioners, for their part, expressed a desire to see some of these pressing maintenance problems themselves and instructed the county manager to schedule a tour of both the school system’s and the community college’s facilities.
Can county borrow more than voters approved? https://alamancenews.com/does-a-bond-premium-exceed-revenue-limits-set-by-area-voters/
See the newspaper’s editorial opinion on the bond possibilities and options: https://alamancenews.com/lower-interest-rates-for-government-bonds-who-should-benefit/