In these days of “easy credit,” one receives credit cards in the mail nearly weekly, can readily purchase a car or household items on terms and gets spam daily for “low rates on mortgages.” Although an individual or business may go into debt easily, it is an entirely different matter for a county. Georgia law will not permit the commission chairman or county manager to simply go to the local bank and sign a form note or lease.
Reflecting the seriousness of long-term obligations and the burden they place on future commissions and taxpayers, borrowing by counties is highly restricted and must be obtained in strict conformity with Georgia law. Georgia Constitution of 1983, Art. 9, Sect. 5, Para. 1(a) provides in part:
“[N]o county … shall incur any new debt without the assent of a majority of the qualified voters of such county … voting in an election held for that purpose as provided by law.”
While a referendum is required for ordinary debt, there are limited exceptions to the referendum requirement for revenue bonds, tax anticipation notes, lease-purchase obligations and certificates of participation, authority borrowings and certain specialized types of borrowing as described in this article. However, any county borrowing must meet the requirements applicable to one of these categories.
General obligations or “G.O.”? are debt, usually but not necessarily taking the form of bonds, made by a county representing its full faith and credit and backed by its ad valorem taxing power. A general obligation can be issued for any purpose for which ad valorem taxes may be levied. However, the total of outstanding G.O.’s incurred by a county may not exceed 10% of the assessed value of all taxable property within the county. Every general obligation debt must have a term not in excess of 30 years, and before incurring the debt the board of commissioners must provide for the assessment and collection of an annual ad valorem tax sufficient to pay into a sinking fund an amount sufficient to pay the principal and interest.
A general obligation for a new financing must be authorized by a referendum election. To accomplish this, the county commission adopts a resolution calling for a special election for one of the four dates each year on which such a referendum can be held. The call for election must be published 30 days (typically five weeks) in the official county newspaper and include the date of the election, a statement of the question of whether debt shall be incurred by the county in a particular amount and for particular purposes (stated separately unless they constitute one project), the amount of principal to be paid in each year, and the interest rate or maximum interest rate applicable. A bond referendum is conducted by the county elections superintendent in the same manner as a general election. If the referendum is held at the time of a general election, the bond issuance question may be included on the ballot for a general election. However, if it is held on the date of a primary, the question should be placed on a separate ballot so that the voters are not required to use a party ballot to vote only in the referendum. Every debt referendum must be “precleared”? with the U.S. Department of Justice under Section 5 of the Voting Rights Act of 1965, through a filing that must be completed more than 60 days prior to the election date.
General obligation debt also may be authorized without assessing ad valorem tax when a Special Purpose Local Option Sales Tax (SPLOST) referendum question includes the language:
“If imposition of the tax is approved by the voters, such votes shall also constitute approval of the issuance of general obligation debt of the county in the principal amount of $______________ for the above purpose.”
When so authorized, SPLOST debt is payable first from SPLOST receipts, although ad valorem taxes would have to be raised if the SPLOST receipts were not actually sufficient to repay the debt. SPLOST debt must be used to pay for SPLOST projects and cannot extend beyond the term of the current SPLOST. The county commissioner’ resolution calling for the election must set out the specifics for the debt proposed to be issued with the same level of detail discussed above for ordinary general obligations debt.
This authorization to incur debt to fund SPLOST projects frequently is not included in SPLOST referendum questions. Apparently this is due to county officials’ concerns that voters supporting the SPLOST may not support the referendum for fear of incurring debt. This seems to be a misunderstanding because the debt is to be repaid from the SPLOST receipts that presumably those voters would support and pay otherwise. SPLOST debt frequently can be obtained on very favorable terms due to the twin repayment sources, the SPLOST and the full faith and credit of the county, and is a great asset to the county. It allows the county to commence SPLOST projects promptly after the authorization of the SPLOST, then show the voters the resulting facilities. Without borrowing, work on the facilities can only commence after complete funding for the project has been collected through taxes, resulting in long delays. SPLOST projects might also be funded in advance by lease-purchase and COPs arrangements, discussed below.
Counties have the ability to issue revenue bonds for a variety of potentially revenue-producing undertakings such as transportation facilities, water and sewer systems, solid waste operations, libraries, sports facilities, exhibition facilities, parking and jails. Revenue bonds do not require voter approval unless issued for gas or electric systems.
Revenue bonds represent no call on the full faith and credit and taxing power of the county, but must be payable solely from revenues of undertakings for which bonds can be issued that are pledged for that purpose. Consequently, revenue bonds can only be used when the undertakings will be self-sustaining from the revenues pledged. However, a number of like or unlike undertakings can be combined so that the revenues from an established, profitable undertaking can support a new or unprofitable undertaking. Although a county can use its general funds to pay debt service on revenue bonds, general funds may not be pledged or committed for such purpose. All revenue bonds, like general obligation and SPLOST bonds, must be validated in court proceedings prior to closing.
When revenue bonds have been authorized and validated for an undertaking but have not yet been issued, the Revenue Bond Law authorizes counties to borrow through “interim receipts,”? commonly known as bond anticipation notes. Bond anticipation notes are used to obtain an advance of funds for the acquisition or construction of an undertaking and are payable from the proceeds of the bonds when issued. Several federal loan programs, for example USDA water and sewerage loan programs, permanently finance county revenue systems through loans evidenced by revenue bonds, require that the county complete construction of the system improvements to be financed prior to funding the loan, and the county typically obtains the interim financing from a bank construction loan evidenced by a bond anticipation note.
A county may have available an appropriate authority with power to issue revenue bonds on the county’s behalf. The powers of particular authorities are sometimes unique and frequently limited, so that legal counsel should be consulted to determine whether an authority may finance for the county and in what circumstances. When permissible, the county and the authority can enter into an intergovernmental contract, and together engage in an indirect county-backed financing known sometimes as a contract revenue bond, without a referendum, and even if the facilities financed will not pay for themselves from ordinary operations.
A county and an authority may enter into an intergovernmental contract for a term of up to 50 years for the provision of services for the use of facilities. However, both the county and the authority must have express authority under law to undertake that type of facility or provide that type of service. If such a contract may be entered into, the authority may be entitled to issue revenue bonds for a facility to be used by the county and to pledge the county’s obligations under the intergovernmental contract as partial or full support for the bonds. The contract constitutes the full faith and credit obligation of the county so that the bonds are secure and readily marketable. This type of financing may be particularly useful in situations where a facility or utility system to be financed is not expected, at least initially, to operate in the black.
Tax Anticipation Notes
Tax anticipation notes (TANs) allow a county to even out its revenue collections during the course of a year. Counties are permitted to incur debt by obtaining TAN borrowings that must be paid off within the same calendar year. The amount of TANs used in a year cannot exceed 75% of the total gross income from taxes of all types (including SPLOST) collected by the county in the preceding calendar year, and cannot exceed, of course, the total anticipated revenues (including SPLOST) for the current calendar year. Further, a TAN may not be obtained if there is an unpaid TAN from any prior year.
Although TANs ordinarily are used to smooth out differences between operating expenditures and revenue collections, TANs are sometimes used to fund a capital project when some kind of permanent funding is expected before the end of the year. Of course, this can only be done when the TANs do not exceed 75% of prior year tax revenues. TAN borrowing in anticipation of permanent funding of a capital project may not be prudent if anything could derail the permanent funding, putting the county in a financial bind at the end of the year.
When tax anticipation notes are issued to pay operating expenses, the rules on federal tax exemption of interest place limits on the amount and timing of TAN borrowings. The county must estimate its largest cumulative cash flow deficit for its general fund and any other amounts that are available to pay general operating expenses, and can always borrow up to the amount of such deficient plus a reasonable reserve of up to 5% of the prior fiscal year operating expenditures. More restrictive limitations may apply if the county seeks to avoid arbitrage rebate responsibilities, and bond counsel should be consulted.
As an exception to the general rule that leases and other contracts may not extend beyond one year, counties are empowered to enter into multi-year lease, purchase and lease-purchase contracts for property to be acquired. There are a number of conditions imposed upon such a multi-year contract. The contract must state the total obligation due in each calendar year. Although the contract can provide for automatic renewal unless the county takes some positive action, the obligation of the county to make payments must terminate absolutely and without further obligation at the close of each calendar year. If the contract is not renewed, the county will lose the property financed and may be liable for the stated obligations for the last year for which the contract was renewed.
Such lease-purchase or installment sale contracts may be used as financing. The contract will allocate a portion of the county’s payments to principal and a portion to interest. If the payments are made in full, the county will own the asset free and clear. ACCG can assist counties in these arrangements. In the typical contract, ACCG acquires the property and makes it available to the county in return for monthly, quarterly, semiannual or annual payments corresponding to principal and interest on financing obtained from third parties. The principal amount of the contract will be the acquisition and/or construction costs of the property and interest will be determined by agreement with the lender and based on market conditions at closing. The term of the contract will be set by the parties, with consideration given to the useful life of the property financed and the repayment sources.
A county must make an annual appropriation for payments expected to be due with respect to the contract during its fiscal year. Should the county fail to make an appropriation or should it take affirmative action under the terms of the contract to not renew at the end of the calendar year, called a “nonappropriation,” the property will go to the lender. In addition to the loss of the property, the failure of the county to complete the contract could be expected to prevent it from obtaining similar credit in the future.
A lease-purchase financing must be for the full cost or value of the property subject to the contract, so a county cannot have “equity”? in the property. Georgia law prohibits a county from giving away or forfeiting property the county owns or pays for, and this would happen if the county had equity in the property at the outset of a lease-purchase contract and did not renew the contract after the first year. The county may improperly create such equity if it pays for and does not finance a portion of the cost of the property, or where the county includes land that it already owns in a financing for buildings or improvements. Legal counsel may be able to assist in structuring around these “equity”? issues by narrowing the scope of the property made part of the lease-purchase or by reallocating borrowed funds to a different project.
There are several other limitations on lease-purchase financing. Without a court order, property cannot be financed if it has been the subject of a failed referendum within four years. The total principal amount of lease-purchase financing, when added to outstanding general obligation debt, cannot exceed 10% of the assessed valuation of all taxable property in the county. For real estate financing additional limitations apply. A public hearing must be held prior to entering into a real estate contract. The average annual payments of real estate financings cannot exceed 7% of the governmental fund revenues of the county for the calendar year preceding the closing (plus any SPLOST receipts dedicated to such purpose). Further, unless that real property was approved in the last SPLOST referendum, it may not be the subject of lease-purchase financing if it would push the total principal amount of such financings over $25,000,000.
Lease-purchase financing frequently is used to finance projects to be paid for by a special purpose local option sales tax, particularly if the SPLOST referendum did not include a debt authorization as discussed above. A SPLOST project cannot be commenced until actual funding is obtained, and the gradual accumulation of sales tax may result in a prolonged delay before the voted-for project is actually available. However, if a lease-purchase is used to finance the project after the approval of the SPLOST referendum, the project can be undertaken immediately and the sales tax receipts can be used to make the payments. Lenders look favorably upon such arrangements because the SPLOST receipts cannot be diverted to non-SPLOST projects.
Certificates of Participation
Certificates of Participation (COPs) actually are a variety of lease-purchase contract and are subject to all of the same rules, and then some. Typically, to accomplish a COPs transaction a trustee issues securities that represent percentage interests in the right to receive payments from the county under the lease-purchase contract. The county will need an underwriter to sell the COPs in the bond market, and similar documentation to that applicable to a bond issue is used. Like many bond issues, the COPs may be insured and the county may be required to take on continuing information disclosure obligations. Although there may be more costs and complexity with COPs, the interest rates and term may be more favorable than a privately placed lease-purchase.
Counties may issue tax allocation bonds repayable principally from increments of ad valorem taxes above a baseline value established in a tax allocation district. This method only is available in the counties that have adopted the Redevelopment Powers Law by virtue of a local act of the General Assembly and a voter referendum approving that local law. Tax allocation bonds typically are used to finance public infrastructure undertaken to spur private developments.
Georgia law also permits a county commission to establish districts within the county, any of which districts can itself issue general obligation bonds or revenue bonds payable from the ad valorem taxes or revenues generated within that district alone. This may be useful if only a portion of the county will benefit from the financed facilities, for example, when a water system serves only a portion of the county.
Going About Borrowing
A good place to begin the process of borrowing is discussion with the county attorney and a recognized bond attorney. County borrowings are not automatically tax-exempt, so bond counsel should be consulted. The attorneys will advise as to the types of borrowing available and the procedures involved, and will prepare the necessary documentation and give the necessary legal opinions.
ACCG is also a resource, and can provide information regarding financing sources and methods. Particularly, ACCG will facilitate lease-purchase financing and COPs by serving as the entity acquiring the assets and providing them to the county, avoiding any need for the county itself to create a separate entity.
Although obtaining financing may be as simple as the county obtaining a proposal from a bank, a county may utilize the services of a placement agent or financial advisor to assure that the county obtains the best structure and proposal, or an underwriter to market publicly-sold obligations.
In many cases there will be a paying agent and funds custodian to handle the money flows, and in some instances this will take the form of a corporate trustee. Publicly-sold debt is frequently insured by one of the major bond insurance companies, and publicly-sold obligations are typically rated by Moody’s, S&P or Fitch.
Who said going into debt is easy? By design, credit is not easy for counties. Although there are a variety of methods for borrowing, described above, the procedures and limitations applicable to each are rigorous. General obligation debt is available for all county purposes but, like SPLOST debt, requires a voter referendum. Revenue bonds are available for certain undertakings capable of producing revenue, but the source of payments will have to be satisfactory to the lender and, like all other bonds, revenue bonds must be validated in court proceedings. Contract revenue bonds might be issuable if the county’s project is one within the powers of an appropriate and available authority. Tax anticipation notes provide limited financing within the course of a calendar year. Lease-purchase financing and COPs are available within limits without a referendum or validation proceedings, but are subject to a variety of restrictions. Tax allocation bonds and district debt are available in particular circumstances.
County officials should take care that a borrowing fits one of the allowable categories and that all of the “hoops”? are jumped through. An improper county borrowing could result in personal liability of the county officials that acted. County officials should seek and take the advice of the county attorney, bond counsel, ACCG and knowledgeable financial professionals to find appropriate means to finance needed projects.