AGENDA #5b
BUDGET WORKING PAPER
TO: W. Calvin Horton, Town Manager
FROM: Jim Baker, Finance Director
SUBJECT: Financing Authority for Local Governments in North Carolina
DATE: April 4, 2001
The Council requested information on the different methods available to local governments in North Carolina for financing the purchase of capital equipment or financing capital projects.
Below is a list of financing alternatives that can be used by the Town and other local governments, followed by a brief description of each financing method. Most types of financing in North Carolina (except small equipment purchases using installment contracts) must be approved by the N. C. Local Government Commission.
The issuance of General Obligation bonds (GO bonds) is the most commonly used financing method for the purchase of large capital equipment and for construction projects. Issuance of GO bonds requires approval by the public through a bond referendum and requires approval by the N. C. Local Government Commission (LGC). When approved GO bonds are issued, a local government pledges to repay the debt from any and all revenues available to the unit. This pledge is generally referred to as a pledge of the “full faith and credit” of the governmental unit, including a pledge of property tax revenue. Maturities on GO bonds are normally about 20 years.
The basic rule on the amount of debt that may be issued by a local government in North Carolina is that the principal amount of debt may not exceed 8% of the value of the taxable property base in the unit. The ratio of outstanding bonds plus authorized and unissued bonds to the tax base is known as the net debt ratio. The Town’s net debt ratio at June 30, 2000, was less than 1%, with outstanding bonds of $20,225,000 and authorized and unissued bonds of $4,250,000. The combined outstanding and unissued bonds of $24,475,000 divided by the Town’s tax base of $2,944,165,000 yields a net debt ratio of 0.83% (eight-tenths of one percent).
There is a provision in N. C. Statutes that allows units to issue bonds each year in an amount equal to two-thirds of the principal amount of debt retired in the previous year. These bonds may be issued without a referendum but must be approved by the LGC in the same manner as other debt financing methods. Because the cost of issuing GO bonds is about $25,000 to $30,000 per issue, it is generally more cost effective to issue two-thirds bonds only at the same time as another planned bond issuance, perhaps totaling several million dollars.
In past years, the Town issued revenue bonds several times for off-street parking operations, including the purchase of parking lots 2 and 5 and for the James C. Wallace Parking Deck. In 1994, all of the Town’s parking revenue bonds were replaced by Certificates of Participation.
General Statute 160A-20 allow local governments to enter into installment contracts to finance the purchase of equipment and land, or for construction projects. Under this method of financing, the unit enters into a contract with a financial institution in which the financial institution provides funding for the purchase of equipment, land, or for construction projects. The financial institution maintains a security interest in the equipment or project until the governmental units repays the loan over a specified maturity. For these contracts, local units pledge to pay the installments for any revenues available, but does not pledge the “full faith and credit” of the unit. Contracts under $500,000 and less than a five-year maturity do not require approval by the LGC.
Installment contracts for equipment greater than $500,000 or maturities over five years require approval by the LGC, except for the purchase of vehicles and rolling stock which may be purchased in any amount without LGC approval. Installment contracts involving the purchase of land or buildings and improvements to land or buildings require approval by the LGC regardless of the dollar amount or maturity involved.
The Town has used installment contract financing for the annual purchase of vehicles and computers and other equipment for various purposes. Currently we propose the use of installment contracts for the purchase of land for a public works site and for capital renovations for existing Town buildings as a part of its proposed Capital Improvements Program.
General Statute 160A-20 also allows a local government unit to issue Certificates of Participation (COPS) which involve another form of installment contract financing. The certificates are similar to revenue bonds, except that the purchasers of the certificates are entitled to receive installment payments from any revenues available to the unit, not solely from the operation of the project financed with certificates. The ‘full faith and credit” of the government may not be pledged for repayment of certificates. Issuance of Certificates of Participation also normally requires the use of underwriters and involves substantial issuance costs.
In 1994, all of the Town’s outstanding Parking Revenue Bonds were replaced with the issuance of $7,030,000 in Certificates of Participation. These certificates pledge to make installment payments on the certificates from any revenues available to the Town, and the pledge is not restricted to repayment only from parking revenues.