To:Mr. Thomas L. Beckett, County of Orange
To:Mr. Thomas L. Beckett, County of Orange
From:Joanna Bowes, KNN Public Finance
Date:March 28, 2008
Subject:County of OrangeTeeter Program Analysis
The County has engaged KNN Public Finance to evaluate the County’s current Teeter Program.
This memorandum summarizes the analysis that has been performed to review the current Teeter program, evaluate the various options available to the County to fund future delinquencies and to retire debt, discuss historical and future trends affecting the program, and provide examples of other CaliforniaCounty programs.
History
The California legislature enacted the Teeter Plan, an alternative method for distribution of property taxes to local agencies, in 1949. It is a program that is unique to California. The CountyBoard of Supervisors adopted the Teeter Plan in June 1993 (Resolution No. 93-75) which or OrangeCountyincludes assessments as well as property taxes. In 1995, the Orange County Special Financing Authority, a joint powers authority created between the County and the Orange County Development Agency, issued $155,000,000 Teeter Revenue Bonds in five series of bonds (one taxable and four tax-exempt) maturing in 2014 toretire $64 million tax-exempt 1994-1995 notes and $111 million taxable notes,as a part of the bankruptcy restructuring of the County’s Teeter program. The 1995 bonds are a limited obligation of the Authority, payable primarily from delinquent taxes and redemption penalties received by the Authority. The initial issuance of the bonds had a LOC and Liquidity Facility. The LOC was eventually replaced with bond insurance.The current outstanding par amount for the variable rate bonds is $123,750,000 representing $122, 650,000 in tax-exempt bonds and $1,100,000 in taxable bonds. The County’s Teeter program was created by special legislation and is the only JPA program in the State.
In the past three years, the County has seen a change in the trend of tax delinquencies. There has been an escalating increase in the County’s delinquent taxes, with FY 2007-08tax delinquency purchases being $89 million, an86% increase over FY2006-07 purchases. Although this trend can be attributed the economic changes the County has experiences, the 2006-2007 buying increase happened to coincide with the original Teeter Program’s plan to commence retirement of the outstanding bonds and wind down of the current program in 2008.
Teeter Plan & Model
As permitted by special legislation, the structuring of the County’s 1995 Teeter Plan was a joint powers authority the issued $155,000,000 in bonds with a twenty year maturity. An integral part of the restructuring was the development of a model toprojectplan revenues that included tax delinquencies, penalties, and interest as well as to expenses of the program.In addition, the model tracked and measured plan data to meet all the legal requirements of the program. As part of the Teeter Plan analysis project, the model was carefully reviewed. The original assumptions had performed with remarkable accuracy until the 2006-2007 plan year. The drastic economic changes experienced by the County in the past two years as exhibited in the increase tax delinquencies challenge the structure of the Teeter Plan.
General Overview of Teeter Plan Analysis
A comprehensive analysis of the County’s Teeter Program included updating all of the Teeter Program statistics from 2001 (the date of the last remarketing of the bonds), review of the program’s legal requirements, cash flow analysis, plan expense and investment return, program effectiveness under the current model, program administration, general fund benefit and current and potential problem issues. This analysis was fundamental to development of County program options.
In addition analysis researched programs and financing methods of other TeeterCounty programs in California. This information was evaluated in consideration as feasible alternatives for the County.
Finally, we reviewed past economic and market trends including real estate statistics and interest rates. It was determined that aforecast should be done in conjunction with a professional economist, focusing on OrangeCounty and its particular financial trends. To this end Dr. Adrian Flessig at CSU Fullerton has been retained to work with the County and KNN.
Performance
The County’s current Teeter Program has met all the legal requirements as set forth in the special legislation that created the JPA program and also has met all the legal provision in the Teeter laws including the Tax Loss Reserve Requirements. The program has been extremely lucrative supplementing the County’s general fund annually.
The programs largest expense is interest rate on the bond which until recently, had been at the lowest levels since the program’s inception. The original Letter of Credit was replaced by bond insurance in 2002 and the Stand By Purchase Agreement has been renewed for minimal additional expense. Current investment agreements expire in November 2008.
Objectives and Options
Despite its past performance, the Teeter program as it is structured today does not allow the County the financial flexibility to meet the program’s objective to fund the annual purchase of the Teeter portion of the County tax delinquencies. A combination of legal restrictions, economics, and program limitations require the County find an alternative to finance annual delinquencies and to retire outstanding bonds. Alternatives to be considered are:
- Restructure current program
- Internal funding program
- Tax-exempt commercial paper program
- Tax and revenue anticipation notes.
Restructure of Current Program
This is a very limited option because of the particular legal restrictions placed on the County’sprogram. The issuance of bonds is limited to the original par amount of $155,000,000. The maturity date of any additional bondscannot extendbeyond 2014, the original maturity date of the bonds. The County needs the flexibility to extend the repayment date of the bonds as well as the flexibility to finance future tax delinquencies that are anticipated to exceed current funds available in the Teeter Revenue Fund.
Internal Funding
Many of the California Counties fund the annual Teeter tax delinquency purchase with various forms of internal borrowing. This option does not allow the County the financial flexibility to restructure the outstanding Teeter Bondsand, and the same time, to have the financial flexibility to buy an undetermined amount of tax delinquencies.
Tax-Exempt Commercial Paper Program
The structure of atax-exempt commercial paper program allows for maximum flexibility for short term borrowing. For the County, a CP program allows formaximum flexibility in the purchase of tax delinquencies and inthe retirement of the outstanding bonds. Most commercial paper programs are secured by a letter of credit and, in this case, will be secured by the County general fund as well as a lien on Teeter tax delinquencies. The flexibility of the program addresses the County’s objective to manage the volatility in the non-payment of real estate taxes that become the annual Teeter delinquencies and at the same time, provide a structure for the retirement of the outstanding bonds. RiversideCounty implemented a commercial paper program for its Teeter program a decade ago that has proven to be extremely successful. San DiegoCounty also had a commercial paper program but in recent years has funded their Teeter program through TRANS and internal borrowing.
TRANS
Tax and revenue anticipation notes are another alternative forCounties to fund annual Teeter tax delinquencies. An annual short term note is issued for tax delinquencies and repaid within the same fiscal year. Although TRANS are a means of short term financing, they are not appropriate for longer term financing needs as in regard to the retirement of the outstanding bonds.
Alternative Program Cost
The least expense alternativewould be an internal borrowing if the County has the funds to do so. The Teeter plan requirement for a longer maturity schedule to accommodate the restructuring of the outstandingbonds disqualifiesthis as an option. In addition, determination of an interest rate for such a structure presents issue in regards to transparency and fair practice.
Because tax-exempt TRANS are short term, cost of issuance and interest rates would be less as there is no credit enhancement and maximum maturity is 13 months. This structure does not address the objective of the County to develop a schedule in retirement of the outstanding bonds coincident with the annual purchase of delinquencies.
Restructuring the current program would incur all the standard bond refinancing expenses including insurance or some type of credit facility. Analysis of the structure of this type of financing presented a number of issues, particularly as a certificate of participation.
Tax-exempt commercial paper requires a direct pay letter of credit as well as other program fees. Since it is a short term note, interest rates will be lower.
Recommendation
Instituting a tax-exempt commercial paper program will give the County the financial flexibility it needs to restructure the current program and address the need to finance future annual tax delinquencies