Each year as counties prepare their budgets, along with the routine maintenance and operational costs, counties inevitably face the need to budget for some routine capital items. Law enforcement vehicles or road grading equipment may need replacement; radios, computers or office equipment may have worn out; gravel and road base material may be needed to repair county roads; or the courthouse roof may need patching. All of these are, technically, capital expenditures – that is, they can benefit the county over a period of time. While financing these items over a period that matches the useful life is possible, many times the county acquires these items by simply paying cash for the items as part of the annual budget or by leasing.
Two problems arise from such treatment. First, to the extent the entire cost of the item is paid for in one budget year, taxpayers incur a disproportionate cost in the current year for the item which ultimately benefits potentially different taxpayers in later years. Second, to the extent the county leases the item or acquires it through a lease purchase arrangement, there are built-in transaction costs in each lease or lease purchase agreement, and the cumulative cost of those individual purchases will be much more expensive than if the county financed all of the capital items it needs for the year with one transaction.
Some counties have used tax notes to consolidate the acquisition of all of these capital items during a year with one loan. This has allowed the county to reduce its M&O costs and realize the benefit of more efficient (cheaper) transaction costs for buying these items. Counties typically implement the program in the following manner: At the time the county sets the budget, it identifies all of the eligible capital items. Then it can issue one tax note at the beginning of the year to pay for these items as needed during the year. Alternatively, the county adopts a reimbursement resolution at the beginning of the year listing eligible items and then either pays for them with the available fund balance during the year or issues the notes and reimburses the fund balance for expenditures at year-end.
An effective tax note program requires coordination among the members of the Commissioners Court, the county auditor, the financial adviser, and bond counsel. The tax notes may be issued based on a recommendation of the county auditor. The financial adviser can “run the numbers” and show what savings can be accomplished through the program as opposed to buying the items on an ad hoc basis. Because of the size and short maturity schedule for tax notes, these may be attractive to local banks which may offer good borrowing rates to the county. Bond counsel will build the legal documents and get the transaction through the attorney general’s office.
Tax notes can be issued to mature over any time period up to seven years, and so the tax notes can be fine-tuned to match up with the expected useful life of the capital items the county is buying. By issuing one note for all these routine capital purchases for the year (and then buying each item with cash), the county minimizes its borrowing costs. The county sets the I&S tax rate for the notes each year and can have a corresponding reduction in its M&O rate. Counties that have used this program over a number of years have been able to develop and maintain a level I&S rate adding notes and structuring the maturities to keep the rate level for taxpayers over time.
For more information on the county’s use of tax notes, see the Public Finance Handbook published by the Texas Association of Counties, http://www.bickerstaff.com/wp-content/uploads/2017-Public-Finance-Final.pdf – Information provided by David Mendez, Bickerstaff Heath Delgado Acosta LLP