AGENDA #4i

MEMORANDUM

TO:                  W. Calvin Horton, Town Manager

FROM:            Kay Johnson, Finance Director

SUBJECT:       Questions from Council Member Harrison

DATE:             March 10, 2005

At the March 3rd meeting of the Budget Review Advisory Committee, members were encouraged to ask questions of staff.  Below are answers to questions received from Council Member Harrison regarding the Town Operations Center Certificates of Participation (COPs) financing.

1.  How long is the financing period? 

The financing period is 20 years, the maximum recommended by the Local Government Commission for financing a building project of this sort.

2. How much higher are the rates on COPs than rates on GO bonds? 

Investors now look at COPs much the same as general obligation bonds.  However, COPs are not backed by the full faith and credit of the government, so there still exists a low, but possible risk of non-appropriation of funds to pay the COPs debt.  For that risk, investors have required a premium.  Although the premium varies based on supply and credit support, we have seen that premium, or spread, from COPs to G.O. bonds decrease over the years.  In today's market, COPs rates are approximately 15 to 18 basis points above General Obligation bond rates.  For example, if a general bond issuance had an interest rate of 4.5%, the rate for the same issuance as COPs would be approximately 4.65% to 4.68%.

Many governments including the State of North Carolina have chosen to issue COPs for the most essential items in their capital programs, that is, items that are critical to providing services consistent with the mission of local governments in North Carolina.  Frequently, COPs are issued for essential government buildings like courthouses, police headquarters, schools, operations buildings, jail and justice facilities. 

3. Are COP rates floating or fixed?  If floating, what is the reference rate? 

COPs rates can be either floating or fixed.  We are planning to issue overall fixed rate COPs.   COPS issued as serial bonds have a fixed rate for each year’s bond, but the rates for the various years may be different.  For example, year 1 repayment may be at a lower rate than year 18, but the rate is fixed for both.

4. Do the COPs receive the same tax treatment for their owners as municipal bonds? 

In terms of tax treatment, COPs are subject to the same securities laws and are required to have a tax and validity opinion from bond counsel.  As such, COPs are treated the same as G.O. bonds.

From an investor standpoint, COPs have the same tax treatment as general obligation bonds.

5.  Will the repayment stream be fixed (equal annual payments) or variable?

Annual payments will be fixed, but will not be equal amounts.  In general, the Local Government Commission requires that principal payments be equal.  If you use fixed principal payments, the actual payment amount will decrease each year.  However, we have been granted permission to reduce the principal payments in the first two years of issuance to ease the effect of the increase in debt on the taxpayers.  The decreased amounts in the first two years will affect the shape of the annual payments in future years.