Deadline for Long-term Loan Approaching

Part II

Editor’s Note: The following question and answer article was conducted by e-mail between the Modoc Independent News and Richard Arrow, chief financial officer for Modoc County. Our overall question was,“We’re less than 90 days out from the end of the fiscal year and the date the state has said the county has to come up with the $12.5 million to be repaid to the treasury. With that timeline in mind, the over-riding question is, “Where are we?”

MIN -- What is the status of the Fitch credit rating process? When do you expect a decision from Fitch?

Arrow -- We expect to start delivering preliminary information in the next week. We should start discussions and meetings the week of May 13th. Date of rating delivery will be first week of June.

MIN -- How much will the Fitch rating cost the county?

Arrow -- We will be in negotiations with Fitch. Estimated cost at this point is $12,000-$18,000.

MIN -- In the possible event that Fitch decides the county does not warrant a credit rating, will you recommend pursuing the junk bond market?

Arrow -- We will study this option as to terms, costs, and net bond proceeds.

MIN -- How active is the junk bond market in terms of interest in Modoc County’s need for $12.5 million or $12.7 million?

Arrow -- I believe the "junk bond market" is eager to buy bonds at premium prices.

MIN -- What interest rate is anticipated on the junk bond market?

Arrow -- 10 percent to 12 percent.

MIN -- What are the financial consultant and bond broker in S.F. able to do in advance of the Fitch rating?

Arrow -- Provide any preliminary information that is available. Also, to discuss basic bond structure and sharing of other financial information e.g. unaudited statements.

MIN -- The treasurer’s cash flow spread sheet shows a positive balance through the end of the fiscal year. What are the determining factors as to whether this positive bottom line will continue into 2010-11 fiscal year? (This question was answered by Treasurer Cheryl Knoch.)

Knoch -- Determining factors will be whether the revenue comes in at or above what we have projected, and making sure that we stay at or under our projections for expenditures. Unfortunately during July, August and September (and now into October) the State of California payments to the county are mostly withheld until their 2010-11 budget has been passed and determined by their cash flow, so those revenues are usually not forthcoming. The first few months of the fiscal year will be even more challenging than now, as far as cash flow is concerned, if a financing of some kind is not successful.

Questions for the Candidates

Editor's Note: As a public service to the voters of Modoc County, we will be publishing comments from candidates over the next two months. We are tailoring appropriate questions to each race.

Our question to the candidates for Supervisor, District 1 & District 5 was; What precautionary measures will you take as a board member to assure that the future Board of Supervisors will not repeat fiscal mismanagement? In other words, what will you do differently than the previous board to prevent further illegal misappropriation of treasury funds?


All four candidates responses are below, in alphabetical order, starting with District 1. 

Dave Allan - District 1

In response to the first part of your question, the most important precautionary measure to take to avoid fiscal mismanagement, is to realize that there are real and binding laws pertaining to the dispersal of funds. If elected, I will know the law!

In response to the second part of your question, my demeanor (behavior) will be different. If elected, my fellow board members and other elected officials will realize that I'm realistic, ethical, and my principles don't waver.

In other words, I'll not be a party to anything less than open fiscal management, and will not hesitate in taking action to stop any attempt to illegally misappropriate treasury funds.

Dan Macsay - District 1

Supervisor Macsay declined to comment.

Geri Byrne - District 5

This is a critical issue for the board and an excellent question. It is one of the major issues that prompted me to run for office.  I have been researching this, asking questions of knowledgeable people, studying budgets and researching government codes. Thank you to those who have helped me gain an understanding of this complex issue.

The laws are already in place. We need to follow them. Government code states that money may be borrowed from restricted funds with board approval. To my knowledge, this did not occur. My first order of business would be to spearhead a move to create protocols to ensure that laws in place are followed. Qualified experienced people need to be in these positions and the board needs to initiate policies that assure that government codes and sound accounting principles are followed.

In order to make sure laws and procedures are being followed I would like to see:

1) Monthly reports from the auditor and treasurer showing the money in every fund and how it relates to the budget as well as monthly cash flow projections.

2) A monthly review of all significant financial outlays to ensure that they were allocated from the appropriate department's budget.

3) A review of potential significant outlays to ensure they're approved prior to actually paying the invoices.

4) Mini audits by supervisors if the infractions are at a staff level.

5) Require everyone to sign a code of conduct and take regular trainings to reinforce the entity's core value.

In a nutshell: We need to follow the law. We need to solve the problem of the hospital. We need good qualified, conscientious people in elected office. We need a board that takes the time to study the financials and make appropriate decisions. 

Thank you for the opportunity to comment on this important issue.

David Misso - District 5

 When elected I will request a weekly county wide cash flow projection.  I will request that the Auditor and Treasurer file a bi-weekly financial report.  The BOS must be kept current on the financial status of Modoc County!
 Each request for spending that comes to the BOS will be questioned and the department head requesting it will be asked to justify it.
 I feel a member of the BOS should be active in regards to labor agreements.
 I shall not blindly approve adgenda items without having the discussion held before the motion is made!
 I have no problem voting NO!

Details on Long-Term Loan Deal

Part I

Editor’s Note: This is the first of a two-part series reporting on what details are known regarding the county’s proposal to seek the sale of bonds in the amount of $12.5 million or more in order to repay the treasury. The questions were posed by the Modoc Independent News via e-mail to Richard Arrow, chief financial officer for the county.

MIN -- What is the exact figure the county is seeking in bonds?

Arrow -- We do not have an exact figure yet. It will be determined by the negative balance in the treasury of the hospital fund prior to bond sale. It will depend on final costs of financing (underwriter costs, rating, and other financing fees).

MIN -- What is the $1.5 million figure, referred to as servicing the debt, actually based on?

Arrow -- It was originally based on a bond issue of approx $13,000,000 over 25 years at 8 percent interest.

MIN -- Will any of the $1.5 million in debt service go to paying down the bond balance?

Arrow -- Yes. Each annual payment will include interest and principal payments.

MIN -- Can the bonds be paid off early? If so, is there a “penalty” for early pay off? If they cannot be paid off early, why not?

Arrow -- We are planning "call" provisions as well as accelerated principal payments in the bond documents to allow earlier payment.

MIN -- Is the county planning to buy back bonds?

Arrow -- We are studying the issue with the county treasurer. This may be an option if we are unable to sell the full amount of bonds.

MIN -- If the county cannot buy back bonds during the 15-year "loan" period, will the county be required to buy back the bonds at the end of the 15-year period? How does this work?

Arrow -- There is no requirement for the county to "buy back" any of the bond issue. There may be requirements to pay down the principal amounts if there are available funds to do so. There will be agreed upon procedures as stated in the bond documents.

MIN -- What interest rate is being considered?

Arrow -- For a investment grade rated BBB and tax exempt bond issuance, we are anticipating approximately 6 percent interest rate.

MIN -- What is the projected total cost of bond sale if the figure is $12.5 million or more depending on your answer to our first question?

Arrow -- Approximately $430,000.

Tougher Stance from Monday Night Group

Expect the frustrated Monday Night Group to take a tougher stance with the Modoc County Board of Supervisors as the financial clock ticks down on the county’s deadline to come up with a solution for replacing $12.5 million to the treasury.

“We intend to make a stronger statement that hopefully will stimulate the public more,” explained John Dederick, a member of the ad hoc committee. “The county should have been doing something two months ago. Time it is ticking away day by day.”

While Dederick did not reveal the details of the group’s presentation, he did indicate it will include an in-depth analysis of the financial events to date and a review of the board’s strategic financial plan.

The Monday Night Group has not asked to be on the official agenda Tuesday, choosing instead to make its presentation during the opening three-minute public comment period because it is suspicious that any suggestions made public in advance of the meeting could be sabotaged.

“The timing until now has been very suspect,” Dederick told the Modoc Independent News, “especially when it has happened three times.”

What he was referring to is the coincidental timing in which suggestions from the Monday Night Group have been either countered or negated by county officials.

“First there was the letter from the legal counsel for the State Controllers Office of March 30 which detailed for the bond consultants in San Francisco the penalties that could go against the county,” Dederick said. “We never saw that letter.”

“Then there was the board’s missing the TRAN deadline for applying for a short-term loan and the eleventh-hour e-mail from Sen. Dave Cox’s office to Richard Arrow that states special legislation would be difficult to pass in the legislature.

“It seems like when we get something on the agenda somebody is a step ahead of us,” he said and named Richard Arrow. “We will point the finger at Arrow. The county has not being doing much of anything. As for Rick Rudometkin, we’re not sure what his role is,” Dederick added in reference to the county chief administrative officer.

“But the public is becoming more aware of what’s going on,” he added. “If we all worked together, the Monday Night Group and the Board of Supervisors, we could make an impact with the state and get something done.”

-- Ray A. March

New Doc in Surprise Valley

Dr. Roberts Foundation board member Joyce Gysin, left) and Charlene Minto, president of the Surprise Valley hospital auxillary (right) were among those on hand to welcome Dr. Richard Wells to Surprise Valley.

Dr. Wells, D.O., met his future patients at a reception held at the Surprise Valley hospital in Cedarville on Wednesday, April 21.

Asked for his first impressions of the area, Dr. Wells replied, "There are a lot of nice people here. If you come to fit in, you're welcome," he said, adding, "this is a big family in a small town."

Dr. Wells, who came from Miles City, Montana, has been practicing at the Surprise Valley hospital and clinic for one week.
                                                                   

BOS Approves Financial Plan

After nearly a year of pondering over its misappropriation of an estimated $20 million from the treasury and how to repay it, the Modoc County Board of Supervisors on April 13 finally came up with a financial plan etched in a letter to the State Controllers Officer.

While the plan, drafted by Richard Arrow, the county’s chief financial officer, holds no surprises it does contain two proposals that the county will be hard pressed to fulfill.

They are the TRAN funding suggestion by the Monday Night Group, which is a form of optional short-term financing, and special legislation that would allow Modoc County to carry a negative balance in its treasury until the money the supervisors and county officials illegally spent can be replaced.

The county missed the April 9 deadline for applying for the TRAN funding and was subsequently told to apply next year, and the special legislation idea was negated by Sen. Dave Cox who had previously said it would be difficult to get such precedent-setting legislation passed.

Still, the two elements remain in the county’s financial plan as approved by the Board of Supervisors at its April 13 meeting.

Included in the plan is a time table that is based on the release of new audits of county books and culminates with the actual closing of a bond revenue sale on June 25, six days before the end of the current fiscal year when the county budget -- by law -- must show a positive balance.

Deleted from the letter at the suggestion of the Monday Night Group and agreed to by Arrow and the board, was the sentence, “In the case of the Modoc County treasury, cash balances were allowed to go negative without any specific Board authorization to do so.”

The financial plan outlines the county’s intent to manage its finances, including management of cash balances and cash flow, adoption of sustainable and maintainable budgets, communication with the State Controller and other funding agencies and “securitization” of county assets and obtaining long-term financing.
   
The Monday Night Group’s concern for the plan, as expressed at the April 13 meeting, is that it does not specify who is responsible for carrying it out, especially when communicating with the State Controller’s Office.

“Securitization” of county assets refers to using unencumbered county properties as collateral for obtaining a long-term loan, or bond, that has now escalated from $12.5 million to as much as $13 million to $14 million.

TRAN Loan

Piece to Financial Puzzle Goes Missing Overnight

In an attempt to put Modoc County’s financial puzzle together, the Monday Night Group thought it had most of the pieces and then discovered one was missing.
   
The missing piece is called “tax and revenue anticipation note” (TRAN). Contrary to its complex-sounding title, TRAN is routinely used by cities, counties and schools as a form of short-term loan.
   
The Monday Night Group recommended the county apply for TRAN funding because it comes with a lower interest rate than a conventional bank loan, which the county has been unsuccessful in getting.
   
It appeared to the Monday Night Group that the TRAN piece to the puzzle was in place just hours before the ad hoc committee was to make its report Tuesday, April 13, to the Modoc County Board of Supervisors.
   
Discussions were held with TRAN representatives who -- as of the day before the board meeting -- were encouraging the county to apply for the funding, according to members of the Monday Night Group.
   
But that all changed over night when the county’s chief financial officer, Richard Arrow, and County Treasurer Cheryl Knoch told the board TRAN officials were actually discouraging the county from making application because it still did not have its financial books in order.
   
In fact, because the county did not pursue the TRAN money after it was first suggested by the Monday Night Group, the county missed the April 9 filing deadline.
   
It was not clear at the board’s April 13 meeting why there was a sudden reversal of TRAN officials, leaving the Monday Night Group perplexed.
   
One member of the ad hoc committee speculated that the county maneuvered to avoid making application for a TRAN because it would require the county to use property tax revenues as security and the county may need to use that form of collateral in seeking a long-term loan through bond sales.
   
While board chair Dan Macsay said a TRAN application had never been “a question on the board,” it will be an option for 2011-12 fiscal year.
   
Don Demsher, one of the leaders of the Monday Night Group, took issue with the board’s apparent lackluster interest in the TRAN loan when he told the supervisors “You would not get any consideration (by TRAN) unless you applied.”
   
As with the matter of seeking special legislation, also recommended by the Monday Night Group, the board did vote to support the TRAN idea and included it as one item in its letter to the State Controller’s Office outlining its financial plan for replacing an estimated $12.5 million it illegally misappropriated from the county treasury.

More on the letter to the State Controllers Office will follow in subsequent coverage of the April 13 meeting of the supervisors.