By Julie Anderson, Editor
The clock was ticking – literally.
For six years, the Texas Commission on Jail Standards had been urging Walker County to build a new jail. The old, run-down lockup was only able to pass inspection via a grandfather clause, and, furthermore, the jail was bursting at the seams forcing the county to ship inmates elsewhere.
In early 2012, the Walker County Commissioners Court embarked on an educational endeavor, researching 1) what the county would need to keep its jail compliant and allow for future expansion; and 2) the most cost-effective method to make it all happen.
As a committee gathered the necessary facts and figures, they noted another ticking clock, a somewhat expensive one.
“Prices were going up daily,” Walker County Judge Danny Pierce recalled.
The cost of cement would literally escalate every 24 hours. Watching the continually climbing costs of steel, glass, and other necessary products “was simply unbelievable.”
“We cut to the chase and got to work,” Pierce recounted.
The Commissioners Court and jail committee took their findings to the community, conducting a series of town hall meetings complete with presentations on refurbishing the existing structure versus building a brand new county jail.
“We showed the voters in black and white,” Pierce detailed, explaining the necessary expansion needs including not only jail beds, but medical, kitchen and laundry facilities.
The twofold conclusion was clear: First, refurbishing the outdated jail would be a temporary fix. Second, building a new jail would be the most cost-effective option. The numbers yielded the following plan: a new, $18-plus million, 70,000-square-foot, 268-bed facility to be constructed in a podular model instead of the classic linear model which could eventually be expanded to hold more than 500 inmates.
When all was said and done, the community embraced the plan.
“We received such support,” Pierce reported. “It was quite amazing.”
Throughout the process, the Commissioners Court gauged the community’s reaction to help them make a second critical decision: how to finance the $18 million.
Actually, the final call was somewhat easy to make, Pierce indicated. The overwhelming community support, coupled with the time and cost associated with a referendum, led the Walker County Commissioners Court to issue certificates of obligation (COs).
“The community had realized that we made the right decision to build a new jail,” he reiterated. “We did not believe we needed to take the matter to the voters.”
Walker County broke ground on the new jail in mid-December 2012 and is looking toward a completion date of April 2014, according Sedalco, the company contracted to build the facility. Kenny Burns, AIA, with Burns Architecture, LLC, is serving as the project architect.
Gillespie County is looking at an October 2014 completion date for its new county jail. Some three months ago, the Gillespie County Commissioners Court authorized the issuance of general obligation (GO) bonds not to exceed $15 million to finance the jail’s construction.
So why GOs and not COs?
The answer is “very simple,” responded Gillespie County Judge Mark Stroeher.
“Gillespie County chose GO bonds instead of COs because the Commissioners and I made a commitment to our citizens many years ago that when the time came…for us to consider building a new jail, then we would put it up for a vote to let the citizens tell us if they agreed or not,” Stroeher summarized. “We did get some ‘pressure’ to forego the vote by the public and issue COs, but we had made a commitment to our citizens, and we intended to live up to that commitment.”
The tally following the November 2012 election was 6,323 for and 4,188 against, meaning 60.2 percent voted in favor of issuing the GO bonds.
Prior to the election Gillespie County embarked on its own educational campaign, conducting meetings, using an explanatory slide presentation, and distributing a detailed flier (see page 15) including information such as the following:
Q. Why is a new jail being considered?
A. Our 15-bed jail cannot accommodate our average prisoner population of 32 inmates. Consequently, the county currently houses excess inmates in neighboring county jails at a cost of approximately $370,000 per year. Additionally, the existing jail is only able to operate under waivers granted by the Texas Commission on Jail Standards. The construction of a new, larger facility will allow the county to house all its prisoners locally and alleviate the need for transporting inmates out of county. This will allow the deputies to spend more time on patrol. This facility would be expected to serve the county’s needs for the next 30 years.
Never Assume
In order to educate the public, officials – and those engaged by officials such as Walker County’s jail committee – first need to educate themselves. When it comes to financing, this can be an arduous task. In some cases, the initial step is to set aside some stifling assumptions:
- If we can’t pay cash, it’s not worth doing.
- The voters will never go for it.
- If I obligate the county to this debt, some of the constituents will not see fit to re-elect me.
Perhaps voters deserve more credit. It’s safe to say most constituents believe their own home is worth having, even if they had to finance. No doubt many of these same taxpayers are currently financing one, or possibly two, vehicles. Some financed their own education, or that of their children. While paying cash for major purchases, such as a home, is certainly an ideal method, the majority of people simply do not have that option.
Likewise, these same constituents, if asked, may agree that projects designed to better the community are worth consideration. And, once armed with accurate facts and figures, voters can make an informed decision. For example, voters often naturally assume that the selling of bonds means an automatic tax increase. This is not always the case.
If the project does warrant an increase in the tax rate, some taxpayers automatically envision a large increase. The Commissioners Court needs to be sure to correct this misconception by offering taxpayers the correct equations.
Public Finance 101
Generally speaking, counties decide whether or not to hold a bond election based on what is financed. If the project is one that is large and discretionary, such as a new exhibition center, a bond election might be used, said David Mendez, bond counsel with Bickerstaff Heath Delgado Acosta LLP. If the item is not of a discretionary nature, Certificates of Obligation (COs) or Anticipation Notes may be used.
“The Texas Legislature gives the Commissioners Court the authority to issue COs for things that are critical to the core of government, things we are statutorily required to do, such as build or renovate the jail,” he continued.
In Comal County, officials examine three options when issuing debt for capital projects: Tax Notes, COs or bonds, said Comal County Commissioner Scott Haag. Tax Notes can only be amortized for up to seven years, “so our county uses them on smaller projects or when we are in a position to comfortably blend them into the repayment schedule of debt already issued without too much impact on the tax rate.
“COs are used on large projects of definite public necessity,” Haag continued. “Bond issues in our minds are reserved for projects which are considered discretionary (not a public necessity) or which are so large it would not be well received by our residents to not have a vote.”
Comal County issued COs in 2007, with projects including restoring the old courthouse, completing a flood retarding structure, acquiring a right of way for road improvement, and making improvements to various county buildings.
“The public responded very well to this 2007 issue,” Haag maintained.
The following year after months of educating the public, the Parker County Commissioners Court placed a proposition on the Nov. 4, 2008, ballot for public approval to issue up to $80 million in GO bonds for the purpose of construction, improvement, expansion, and upgrading of roads, intersections and bridges within Parker County.
Nearly 60 percent of voters approved the bond package that would raise their tax rate up to 5 cents per $100 valuation.
“From the beginning I stated this wasn’t the county’s bond program or the Commissioners Court bond program,” emphasized Parker County Judge Mark Riley. “It was a community bond program. We built it with the assistance of a community wide advisory board that worked to select projects so that it had something for everybody and every city within the county that wanted to be involved.”
As of this summer, four years into the bond program, all but two of the road projects will be completed, with the remaining set for the spring of 2014, if not before.
What is a Bond?
Suppose members of the community take you up on the invitation to attend educational meetings. And suppose their first question is, “Just what is a bond, anyway?”
An elected official who can explain to a taxpayer the nuts and bolts of public financing will be more likely to earn that taxpayer’s confidence and support, whether for the project at hand or on a future issue.
Because a county is not authorized to go to the bank and take out a loan, it must finance long-term purchases through the issuance of bonds or other authorized obligations.
A bond is like an IOU, defined Patricia Rodriguez, former senior vice president of Southwestern Capital Markets, a finance institution. In most instances, the county hires a financial adviser who assists the county in selling the bonds to buyers in the financial market, and a bond counsel to prepare the documents and obtain approval from the attorney general.
The bond is an agreement between the county and the bondholder, whereby the county receives the money from the bondholder and then agrees to pay the money back, plus interest. The agreement includes the interest rate and the timetable of payments.
Back in the “old days,” bonds were actually printed. Today, very few bonds are printed because most bond sales are completed electronically. The Depository Trust Company keeps track of the bonds and bondholders.
Generally, bonds are issued in increments of $5,000. The Depository Trust Company tracks the maturity of the bonds using identification numbers. Counties make semiannual payments on the bond debt. In most instances, the interest money paid by the county is tax free to the bondholder.
Texas law requires that all bond issues, regardless of the type of bond, be approved by the attorney general’s office. Once approved, the legality of the bond cannot be contested, except for a constitutional challenge.
A county must choose what type of bond to issue, Rodriguez specified.
General Obligation (GO) Bonds
GO bonds are usually used to pay for major capital projects.
These bonds are authorized to fund specific public purposes, Rodriguez described. A public purpose is defined as a “public project or use specifically for the benefit of the county issuing the debt.” GO bond debt is paid by property taxes.
The county must conduct an election in order to sell these bonds. The authority to conduct this election is generally provided in Texas Government Code Chapter 1251, Mendez delineated.
The 83rd Texas Legislature’s House Bill 637 amended the Texas Election Code to now require counties to include additional information in the order calling a bond election and has added additional posting requirements that must be followed, Mendez reported. A bond election order must now include, among other items required by law:
- the proposition language that will appear on the ballot;
- the purpose of the bonds;
- the principal amount of the bonds;
- language stating that taxes sufficient to pay the annual principal of and interest on the bonds may be imposed;
- a statement of the estimated tax rate if the bonds pass;
- the maximum maturity date of the bonds;
- the aggregate amount of outstanding principal and interest on the county’s bonds; and
- the county’s debt service tax rate.
In addition, the county will now be required to post a copy of the order calling the bond election at each polling location in the county as well as three public places in the county and on the county website.
Once the voters pass a bond election, the money must be used for the initially stated purpose. In other words, if voters pass an election for courthouse improvements, the funds coming from the authorized bonds cannot be used to fund a park.
GO bonds fall into two categories.
Unlimited Tax Bonds. This type of bond tells the bondholder that regardless of circumstance (i.e., an unexpected catastrophe), the county will tax whatever amount necessary to pay the money back, Rodriguez said.
County Unlimited Tax Bonds are authorized under Article III, Section 52 of the Texas Constitution. While there is no limitation as to tax rate, the county may be limited in amount to not more than 25 percent of the assessed valuation of real property within the county or applicable county-sponsored district.
Unlimited Tax Bonds can be issued for the following purposes:
- Roads
- Flood Control
- Navigation
- Irrigation
The most common usage of the Unlimited Tax Bonds is for county road bonds.
Those working in the bond market see Unlimited Tax Bonds as the county’s most secure type of debt, usually providing the lowest possible interest rate to the county, Rodriguez maintained.
Limited Tax Bonds. Most GO bonds, as well as Certificates of Obligation, tax notes, and contractual obligations, are Limited Tax Bonds. This tells the bondholder that the county must limit the amount of taxes that can be pledged to pay the debt, Mendez detailed. Under Article VIII, Section 9 of the Texas Constitution, a county can tax up to the $.80/$100 maximum tax rate.
Limited Tax Bonds can be issued for a variety of purposes including (but not limited to):
- Courthouses
- Jails
- Bridges
- Roads
- Hospitals
- Airports
- Exhibition Facilities
Limited tax bonds present more of a risk to the bondholder, Rodriguez stated. In this case, the interest rate on the bonds will likely be higher to offset that risk.
However, Mendez indicated that such risk is limited because the attorney general of Texas will not approve limited tax bonds in an amount which produces debt service requirements exceeding that which can be paid from $.40 of the foregoing $.80 maximum tax rate, calculated at 90 percent collection.
According to the law, GO bonds can be repaid over a 40-year period, Mendez said. However, the market conditions usually result in a payoff period of 15 to 20 years.
Revenue Bonds
This type of bond tells the bondholder that the money will be paid back based on the revenue generated by the proposed project. Revenue bonds are not funded by tax money, Rodriguez stated.
Revenue bonds are usually used more by cities than counties, as most counties do not have the type of facility to generate enough revenue to secure the bond, Mendez said.
Various statutes in the Government Code give the county the authority to issue Revenue Bonds. The bonds do not require voter approval, nor do they require the county to inform the voters prior to issue.
Certificates of Obligation (COs)
COs are bonds that do not require authorization from the voters. However, the county must first authorize the publication of a “Notice of Intention to Issue COs.” The notice has to identify the projects to be financed, and must be published two times in a local newspaper of record at least two weeks before the date of sale of the COs, Rodriguez said.
Legal statutes limit the use of COs, Mendez explained, to:
- Pay for construction of a public work.
- Pay for purchase of materials, supplies, equipment, machinery, buildings, lands, and rights of way for the issuer’s authorized needs and purposes.
- Pay for professional services such as engineers, architects, attorneys and financial advisers.
If 5 percent of the registered voters submit a valid petition protesting the issuance of the COs, the issuance must go before the voters.
Several years ago Carson County attempted to issue COs to replace the county jail, but the voters petitioned in protest.
“Our intention, after cost analysis and much debate, was to save taxpayer dollars by putting the jail on a fast track to completion and not having the expense of an election,” conveyed Carson County Commissioner Kevin Howell. “The citizens decided otherwise. The county conducted a bond election, which passed in the spring of 2010.
COs can be funded by ad valorem taxes, a revenue pledge (as in revenue bonds), or a combination of the two. Like GO bonds, CO bonds can be issued for terms of up to 40 years.
Additional Public Financing Methods
Contractual Obligations
Counties can use this type of bond to finance personal property, only. Contractual obligations are payable from a pledge of revenues, funds or taxes, and have a maximum term of 25 years.
No election is required, however the county has to adhere to applicable bidding requirements, Mendez declared.
Anticipation Notes, also known as Tax Notes or Limited Tax Notes
This financing option was made available to cities and counties by the Legislature in 1993, Mendez said. Anticipation notes can be secured by pledging either ad valorem taxes or revenue, or both.
In the case of a revenue pledge, the county must give specific authority to permit the particular revenue source to be used for the note.
Most counties issue anticipation notes limited by the $.80/$100 tax rate and refer to the notes either as Tax Notes or Limited Tax Notes.
“The greatest advantage is that the process is streamlined,” Mendez emphasized. “There is no election or publication requirement.”
The notes do have a short maturity that cannot exceed seven years from the date of the attorney general’s approval.
Anticipation notes can be used to:
- Pay for construction of a public work.
- Pay for purchase of materials, supplies, equipment, machinery, buildings, lands, and rights of way for the issuer’s authorized needs and purposes.
- Pay for professional services such as engineers, architects, attorneys and financial advisers.
In addition, Anticipation Notes can be used to:
- Pay for operating expenses or current expenses.
- Fund the issuer’s cumulative cash flow deficit.
However, a county is limited to paying notes for these purposes to one year from the date of the attorney general’s approval.
State Infrastructure Bank Loans
Additional authority will permit a county to borrow from the State Infrastructure Bank (SIB loans), and to enter into lease purchase agreements.
Financing Step by Step
The first action a county should take in financing a project is to determine whether or not the county is fiscally able to borrow money and then pay it back, plus interest. In most cases, the county uses a financial adviser (FA) to determine whether or not it is in the position to finance.
Think of the FA as a banker and the county as a potential homeowner, Rodriguez suggested. The person wanting to finance a home says to the banker, “Here’s my income. Here are my expenses. How much house can I afford?” The county wanting to finance a jail says to the FA, “Here is our revenue. Here are our outstanding debts and expenses. How much jail can I afford?”
The financial adviser will develop a debt plan, Rodriguez affirmed. Due to the complex nature of public financing, most counties hire a professional FA from the outside. Using specialized software, the FA can input the county’s taxable value and tax rate and can structure the debt to be repaid in a certain amount of time. The FA can also devise a plan based on projected growth (accompanied by an expanded tax base), or on zero growth.
The FA coordinates with other parties involved in the sale of the bonds, including the underwriter and bond counsel.
Along with using an FA, a county should consider hiring bond counsel, an attorney who specializes in bond finance, Rodriguez indicated.
The FA and bond counsel are two separate entities. While an FA may recommend a bond counsel, a county is not at all bound by its recommendation and can make its own choice of counsel.
“A county should insist that the bond counsel represent the issuer,” Mendez underscored, “so that the bond counsel is looking out for the county’s interests.”
The bond counsel’s duties are to prepare the required legal papers and take the documents through the attorney general’s office for approval. The bond counsel also researches the law with regard to financing options and renders the tax opinion that ensures that the bonds are exempt from federal income tax.
Once the county has decided to sell bonds, the FA and Commissioners Court will decide whether or not to use the competitive bid process or the negotiated sale process to sell the bonds. For a smaller bond issue, a private placement of the bonds may be used.
If a negotiated sale is used, the FA will assist the county in appointing an underwriter to become involved in the selling process. The underwriter does not represent the county, Mendez said.
A negotiated sale occurs when the underwriter negotiates interest rates between the issuer, the FA, and the “market,” which includes institutional buyers and ultimately the bondholders, Rodriguez described.
A competitive sale involves setting a date of sale and taking sealed bids. Whoever offers the lowest interest rate on that day will become the purchaser of the bonds. The purchaser may be an underwriter who will sell the bonds, or an institutional investor who will hold the bonds for his own account.
If a private placement is used, the FA will approach local banks and other financial institutions to try to sell the bonds. Generally, the bank will purchase the bonds to hold for its own account.
Throughout the process, the prospective bond buyers will be looking at the county’s bond rating, essentially a credit rating, which is one of the elements that will determine the interest rate at which a county can borrow, Rodriguez said.
Three major firms provide bond ratings: Fitch, Moody’s and Standard and Poor’s. Generally speaking, all three look at revenues, expenses, administration, and the ability of an issuer to repay its debt.
The rating, the highest being an “AAA” credit, tells prospective buyers what their level of risk is in terms of getting their principal and interest paid.
Keep on Asking
Public financing is not an issue Commissioners Courts deal with on a daily basis. Moreover, it is difficult to remain continually familiar with a myriad of financing options that may change or be amended with each legislative session.
Still, Commissioners Courts shouldn’t let the complexity of financing automatically deter them from taking on worthy projects or making much-needed improvements.
Courts who do decide to explore the option need to be sure to consult experts, such as financial advisers and bond counsel. Ask questions. Consult with other counties who have conducted bond elections or used COs or Anticipation Notes. You may find out that the timing is not right for your county. Or, you may learn about new options that will open new doors for your community.
If the answers you get are too complex, ask the questions again. Tell them you want the facts, plain and simple, so you can explain them to your constituents. After all, the more you understand, the more they’ll understand.