Saturday, October 23, 2021

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Lower interest rates for government bonds: who should benefit?

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As many homeowners know, interest rates are at historic lows, resulting, as we hear it, in lots of demand from buyers and even more from those wanting to refinance their homes.

But how do low interest rates impact governments?

Why, of course, it’s always a great time for governments to spend – i.e., other people’s money. And they believe it is a great time for them to borrow money, as well.
So we expect that local taxpayers can count on local governments to be lining up with “urgent” needs, or at least those that they portray as urgent when they can be financed at what will inevitably be characterized as “bargain” interest rates.

But we’re especially troubled by the discussion at this week’s county commissioner meeting.

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Now let us preface by saying, we at this newspaper are not conversant in the intricacies of the bond market and other high finance, so all this talk of “premiums” and “discounts” amid seemingly complicated bond issues is Greek to us.

But we’re pretty good at gleaning what is being said, or meant, in between “government-speak” – especially when we believe officials are deliberately trying to be vague, complicated, or obtuse.

So here’s what we think is up. If an individual homeowner were buying or refinancing a house, at say $100,000, they would have to pay about $536.82 in principal and interest monthly if they borrowed money at 5 percent on a traditional, 30-year loan. But if interest rates were lower, they’d pay less. At 3.5 percent interest rate, the principal and interest would be down to $449.04, according to an online calculator we used. And at 2.5 percent, even less: $395.12 monthly.

After taxpayers voted in 2018 for $189.6 million in bonds – $150 million for ABSS and $39.6 for ACC – commissioners hiked the property tax rate a whopping 8 cents, ostensibly to “get ready” to start repaying on the bonds that voters had approved.

Well, the bonds still haven’t been issued – more than two years after the successful bond referendums and more than one year and a half since the tax hikes went into effect – but it appears county officials are just about ready to issue them now.

So, when commissioners hit up taxpayers with the 8-cent property tax increase, the assumption was that bonds would cost somewhere in the 4.5 to 5 percent range.

But interest rates have fallen. Dramatically. Now, the county thinks it can get really low rates. And that’s a good thing.

But who should be the beneficiary of that advantage: the taxpayers or the government?
Guess which one the government officials are lobbying for?
Yeah, the government, as usual.

So here’s the deal: because the interest rates are lower than anticipated, the county commissioners could lower the tax rate, because they don’t need that much money any more in order to finance the bonds.

Or, wait for it . . . they could borrow even more money and keep the payments (whether monthly/quarterly/annual) at their existing levels because, after all, the public has become used to the higher tax rate.

Sort of like with our house illustration: a new homeowner might be able to spring for a $120,000 house, instead of a $100,000 one.

Which is what the government is, effectively, proposing.

Or, the homeowner could simply stick with the $100,000 house and save the money he would have otherwise spent on the higher-priced mortgage.

Now, we’ve already confessed to not being bond specialists, and we’re not attorneys, either. But we think we can read plain English; the bond referendums that voters passed in 2018 authorized the issuance of bonds “not to exceed” $150 million for the school system and “not to exceed” $39.6 million for the community college.

With sleight of hand that any high-finance banker would admire, the bond attorneys – and county officials – are now claiming that they can, in effect, get more than $189.6 million in bond revenue. Although somehow instead of calling it bond revenue or proceeds, the excess is now called a “premium.”

And our little example of the relative impact of the $100,000 vs. $120,000 house pales by comparison to the real figures involved in the bonds.

County officials think they can issue $20 million to $25 million more for the school system (i.e., 13 to 17 percent more than voters approved) and about $2.5 million to $2.8 million more on the first half ($17.5 million) of ACC bonds (a similar increase of 14 to 16 percent more than voters approved).

What’s the alternative?

Why, issue bonds in the exact amount (ceiling) of the bonds that voters authorized – and lower the property tax rate that’s needed to pay for them.

Or, here’s another thought. Don’t even issue as much in bonds as the ceiling allows. (After all, the authorization was for “up to” the prescribed amounts.) We suspect lowering the amounts in bonds to be issued by somewhere in the range of 13 to 17 percent would probably result in the same revenue for the schools and community college – but at an even greater savings to the taxpayer.

To his credit, commissioner vice chairman Steve Carter has asked for an estimate on the potential savings for taxpayers, but most of his colleagues seemed eager to issue more bonds and thereby spend more money – and, in doing so, keep the tax rate up.

The key is who should benefit: Alamance County’s taxpayers, or a larger, more bloated government?

We think we know which one most voters would support; the question is: which approach will their commissioners endorse?

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