Refresher Course
Modoc-gate Bailout: Bond Sale Still Alive
Bankruptcy Waiting in the Wings
Editor’s Note: On the occasion of our first anniversary as Modoc County Daily News Blog, we offer the following article, supplemented by a Q & A interview with Auditor Darcy Locken, as an effort to give our readers perspective on Modoc County’s on-going financial future.
The Modoc County Board of Supervisors continues to face financial challenges of immense proportions including its eventual handling of two state-ordered audits, a possible $15 million bond sale to replace funds taken in the board’s treasury raid and the fate of a performance bond claim -- not to mention the possibility of eventual bankruptcy.
In nearly every meeting of the Modoc County Board of Supervisors there lingers in the background the contentious suggestion that the county should sell an estimated $15 million in bonds in order to come up with the money the State Controller’s Office has said must be repaid to the depleted treasury.
The suggestion of a bond sale, which originated last year when the county brought in contracted financial experts, is a divided issue among the supervisors themselves, the Monday Night Group, which opposes committing the county to a long-term debt, and citizens at large who resent being taxed, in the form of a bond sale, as a way to fix a problem they did not cause.
Putting aside speculation on how the board would vote on a $15 million bond sale, if it actually comes to the vote, just how real -- in a practical sense -- is a bond sale? This question was asked of sources who are close observers of the county’s fiscal crisis, who said there are two conditions necessary to put a financing package together.
First, the condition causing the problem must be fixed. In the case of Modoc County the problem was the operating deficits at Modoc Medical Center. It’s routinely expressed by public officials that the reason for the misappropriation of the treasury was to off-set the MMC deficit. Recent creation of the hospital district appears to have solved this problem, according to observers of the county’s financial plight.
Secondly, the ability to service, or pay back, the bonds must be evident. Modoc County should have a line item of at least $1 million in its budget to repay the treasury/bond service, sources explain.
Advise from financial experts is to look for conditions in the financing package which address the problem of repayment.
“These conditions may be very restrictive,” sources say. “They will likely focus on property tax revenues and may immediately direct those revenues upon receipt to a lock box before allocation.”
Considering that Supervisors Dan Macsay and Dave Bradshaw -- who both appear to favor the sale of bonds -- will be leaving the board in January, one question remaining is should there be a rush to act on the bonds, or as Auditor Darcy Locken refers to the bonds in her following interview “certificates of participation?”
“Rushing this before the board before the new members are seated is probably not worth the effort as I doubt the paperwork could be completed anyway,” a source with knowledge of the county’s financial status told the Modoc County Daily News Blog. “That means if it were rushed and passed, the new board could still repeal it if they wished.”
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Editor’s Note: The following Q & A with Auditor Darcy Locken was conducted by e-mail at the end of October and the beginning of November.
Q: Are you under an edict from the Board of Supervisors or CAO Rick Rudometkin to get a bond sale before the present board by the end of the year?
Locken: There is no "edict" from either the board or Rick Rudometkin. The timeline is based on the latest estimate for the release of the 2007-08 and 2008-09 audits. Neither the board nor Rick have any authority over me anyway.
Q: What is the amount of the certificates of participation?
Locken: The amount has not changed significantly. It's dependent on the final deficit in the hospital fund, net the positive balance in their operating fund at the time of financing, plus $1.5 million for a year's debt service, $150,000 for accounting assistance (for the county to hire someone to help me), plus costs associated with the financing (estimated at about $350,000). If it happened today it would be approximately $14.6 million.
Q: What is the anticipated interest rate?
Locken: As of today we're estimating six percent, but will obviously try for lower. It all depends on the market at the time of pricing, and as you well know, a lot can happen in two months.
Q: What are terms of the county's debt service?
Locken: The terms are the same as previously presented. Fifteen years, at six percent or hopefully better with a 10-year call at par. The call provision will effect the interest rate, and the goal will be to get the lowest interest rate possible. The debt will actually be only for 14 years, since at the 14th year, the bonds will be called early at par with the funds in the debt service reserve account (equal to one years P & I). At the 14th year, the county will save approximately $82,000 by not having to have the final year's interest. If the county has excess funds at the end of each fiscal year, it can retire the bonds at any time, at par.
Q: What is the county's collateral?
Locken: This is a lease-lease back structure. The county is leasing the buildings to a non-profit specialty corporation for a one time lease payment (the net proceeds of the issue after paying the financing costs and funding the debt service reserve fund) and then leasing the buildings back from the corporation for annual payments equal to the debt service on the certificates of participation ("COPs").
The properties being leased are the courthouse, the jail/sheriff, 4th Street, social services building, etc. Ownership stays with the county. However, if the county fails to pay a lease payment, it can be evicted from the buildings and the corporation can rent the buildings to another 50(c)(3) entity. At the end of the term of the COP, all of the leases are terminated. This is a common financing structure in the state of California and elsewhere. Many of the state's facilities are financed with the lease-lease back structure.
Q: How soon do you anticipate taking this, the sale of certificates of participation, to the Board of Supervisors?
Locken: That all depends on completion of the audits. The final audits are currently scheduled for release in December. Whichever firm decides to purchase the COPs will need time to review the 2007-08 and 2008-09 audits, as well as draft financials for 2009-10 and the first quarter of 2010-11 -- and I need time to prepare 2009-10 and the first quarter of 2010-11. My guess is that December would be a real push, January is more likely, at this point.
Q: What role, if any, does the unaudited 2009-10 fiscal period play in the Board of Supervisors’ proposal to go for bond sales?
Locken: The company that's interested in buying the certificates of participation has requested the unaudited 2009-10 financials (which, I have to prepare still) as well as the first quarter of 2010-11 (ditto) before we can finalize the deal.
Q: What vote is required of Board of Supervisors to approve the sale of bonds?
Locken: It requires a majority vote.
Q: In your opinion what are the Board of Supervisors’ options in lieu of going for bonds, or in the event the county cannot sell the bonds?
Locken: I think that whether the county is able to sell the bonds now or not, we should continue to go down that path. I believe that our chances of selling the bonds increases as we continue to improve our accounting and managerial practices.
In the meantime, the debt service payment should remain budgeted, and if not used for debt service it should be used to reduce the deficit balances in the treasury. I do believe that there's a point (which, according to our cash flow projections is likely to happen in fiscal year 2011-12) when the cash in the treasury will no longer support basic county services and we'll be back at the bankruptcy option.
Q: Are you saying the only option is bankruptcy?
Locken: I don't think I said that at all. If the county doesn't get the COPs sold (which I still believe is the first, best and most feasible option), I do not believe that we will be able to sustain ourselves for very long. If the COPs are not in place by late 2011, then I believe bankruptcy will come back as an option. The idea that we can pay ourselves back is not feasible. We can't sustain basic county services and fulfill grant and other funding obligations by only returning $1.5 million dollars a year to the treasury (which is really all the general fund can afford to budget).
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Audits Status Update
January Now Target Date
At the Nov. 9 meeting of the Board of Supervisors Locken said the outside auditor, VDT, is now reviewing the final drafts from her office. She said she expects those drafts to be returned by the end of November, but because of the intervening holidays the audits are not expected to be released publicly until January.
-- Ray A. March
