Kane County Commission

MEMORANDUM

To: Kane County Commission

From: Eric Todd Johnson, Bond Counsel

Date: 25 September 2009

Re: Financing new public safety facility

The Kane County jail is a small and aging facility, not entirely adequate for its current use, which includes housing some inmates for the Utah Department of Corrections. Kane County, with input from a citizens group and a professional study has investigated both the need for a new public safety facility, including a jail, and the optimum size and components for such facility.

In every instance, the Board of County Commissioners has followed a course that would not need to increase taxes. The best option is to construct a facility large enough to meet current uses and future projected needs containing 200 beds. The estimated cost of construction is about $15,000,000. According to the professional study, the least tax impact on the County would be to build the larger 200 bed jail. A 200 bed jail is best because the County will contract with the Utah Department of Corrections to house state inmates, which would reduce the tax impact.

This spring, Kane County obtained a loan commitment for the public safety facility from the Utah Community Impact Board for a loan of $7,500,000 bearing 2.5% interest for 30 years. Because of the low interest rate, a longer loan is more desirable. Kane County has since made application to a federal funding agency, the USDA-Rural Development, for the balance of the funding. That application is currently under consideration. If that application is approved, the County will finance the jail entirely through its building authority. These bonds would not authorize an increase in property taxes or pledge property in the County as security.

In July, Kane County and its building authority each authorized notice of the intent to issue bonds in a maximum amount of $18,000,000 and called a public hearing. The public hearing was held on August 24, 2009. Comments from the public were received and fully considered. These proposed bonds would be issued by the County’s building authority and would include the $7,500,000 loan from the Utah Community Impact Board, as well as a separate loan, hopefully, from a federal agency, for which application has been made. Based on the public comments and responses, the County’s building authority is now authorized to issue these bonds.

It is important that the County build the public safety facility. Because the source of funds is not yet finalized, the Board of County Commissioners desired to prepare for potential contingencies. Accordingly, on August 24, 2009, they adopted a second resolution again authorizing notice of their intent to issue bonds and calling a public hearing for September 28, 2009. This additional notice and public hearing are merely to prepare for potential contingencies.

In all of its contingencies, the Board of County Commissioners has only pursued plans that would avoid raising property taxes. None of the proposed bonds or contingencies authorize the County to increase property taxes.

Consistent with Utah law, the notices of intent to issue bonds identify the maximum amount that could be borrowed, as well as the maximum interest rate and maximum term of years on such loans. It bears emphasis that the amount, interest rate and term that ultimately will need to be borrowed is expected to be, and almost always is, less than the maximum’s in the notices. For example, although the cost of construction is estimated at $15,000,000, the notice for the August 24, 2009 public hearing provides for a maximum of $18,000,000. This is wise. Consistent with federal tax laws, traditional financing institutions require a reserve fund often amounting to 10% of the cost of construction.

Thus, to finance $15,000,000 in construction, the amount of $16,500,000 must be borrowed to fund the reserve. This reserve fund is then used to make the final

payment(s) on the loan. In addition, Utah law requires the County to borrow what is known as "capitalized interest", in addition to costs of construction.

Capitalized interest is used to make interest payments during construction. By law, the County cannot make interest payments from County funds during construction. Finally, the Board of County Commissioners determined it would be wise to provide for a contingency in the event costs of construction exceed the estimated $15,000,000. They determined that a 10% contingency would be wise. The 10% contingency, plus the 10% reserve fund, plus capitalized interest account for the maximum of $18,000,000 mentioned in the notice for the August 24, 2009 public hearing.

The notice for the September 28, 2009 public hearing identifies the maximum loan amount of $10,500,000. This is because the County’s building authority already has a commitment for $7,500,000 from the Utah Community Impact Fund Board.

Added together, these add up to the $18,000,000 in the prior notice. The amounts above the expected cost of construction are for the same reasons mentioned above, except for the capitalized interest. Again, this is merely a contingency in the event it becomes difficult to fund the entire public safety facility through the building authority. The building authority has already held the required public hearings and may proceed to finance the entire facility, if it can attract the necessary funding.

As noted above, the interest rate on the $7,500,000 loan from the Community Impact Board is 2.50%. However, the notices provide for a maximum rate much higher. This is because the ultimate source(s) for the additional funds is not certain at this time. Also, it may be several months before any loan commitment is obtained and market forces may cause interest rates to swing. Accordingly, the County and its building authority set 8.00% as the maximum interest rate in their notices for fixed rate bonds. This is also wise because of the potential of issuing the bonds as Build America Bonds, which attract a higher interest rate because of tax incentives. In the very unlikely event that the County agrees to a variable rate loan, the maximum rate was set at 14% in the notices.

It should be noted that the County has been advised that at present interest rates are rather low and it would be best to secure a fixed rate loan. The additional provision for a variable rate loan is purely a contingency.

Finally, the maximum term of the bonds in the notices is 35 years. This is necessary. The Community Impact Board loan is for 30 payments, but no payments are required until the year 2012, meaning it may be 33 years from the date the bonds are issued until the final payment. Because of the low interest rate on 2.5% on this loan, the delay in the first payment is highly desirable. Adding

5 years in the notice to assure the County can benefit from the generosity of the Community Impact Board seemed wise. Although the professional study recommended a 20 year loan, it did not anticipate a 2.5% interest rate, which makes a longer term advisable. Also, a loan from USDA-Rural Development, would also likely be for a term of 30 years and at an interest rate below market rates.

The Kane County Commission has studied the need for and best ways to finance the new public safety facility, without increasing property taxes or pledging property in the County. The Commission has taken and continues to pursue steps that will drive down the cost of financing the new facility. The notices calling public hearings provide for reasonable flexibility to do this. It is the intent of the Board of County Commissioners to finance the jail at the lowest reasonable cost possible, both with respect to terms of financing, as well as costs of construction. The second notice and public hearing is entirely to provide for contingencies, in the event the primary plan of funding the public safety facility through the building authority meets with struggles.