Jail refinance figures disputed
by Mike Kroll
While candidates at all levels seem to be avoiding controversial issues of substance, the two aspirants for Knox County Treasurer are notable exceptions.
Knox County seems to be in perpetual financial disrepair but none of the candidates for County Board seem inclined to actually weigh in with ideas of their own while political newcomers Robin Davis and Ernie Miller have both jumped head first into the fray.
The County Treasurer collects, accounts for and manages the financial resources of Knox County but typically has little or no input in how those funds are raised or spent. Both Davis and Miller seem inclined to be more activist than their predecessors. While Davis has promoted changes in the budgeting process and greater taxpayer convenience in the collection of property taxes, Miller just last Friday proposed a "Cost Savings Plan" for the county.
Miller is proposing that Knox County refinance $7.345 million in bonds sold to construct the new jail and thereby save $680,000 over the next 15 years. "With interest rates at 40-year lows, Knox County can realize tremendous savings over the life of the bond repayments," stated Miller from Republican Party Headquarters in downtown Galesburg Friday morning. While the mathematics can be a bit daunting, essentially Millers plan is akin to refinancing your home mortgage to take advantage of current low interest rates.
The original Jail Bond issue consists of a series of bonds in amounts between $425,000 and $755,000 at rates between 5.305.35 percent. Miller, a local stockbroker, says he was motivated to explore bond refinancing not only to see if the county could save some interest expense but also as a possible means of raising additional funds to help pay for cost overruns at the new Knox County Jail.
Millers spreadsheets show a proposed refinancing plan that projects an overall interest savings of nearly 3.2 percent based on current market rates. As he explains it, his plan accounts for an estimated $146,000 in refinancing costs and would still produce a net savings to the county. Miller also suggests that rather than utilizing surplus sales tax revenues to pay for some of the expenses associated with the new jail project, these be utilized to help pay down the bonds at an accelerated pace. He says that Knox County would actually save money by selling tax anticipation warrants instead of using sales tax money on such expenses.
It must be noted that this plan would do nothing to solve the near-term financial challenges facing Knox County. Neither the money from the public safety bonds nor the sales tax revenue can be legally utilized to offset unrelated county expenses. If Millers numbers hold true, the actual impact will be to lower the accumulated interest expense involved in financing the new jail.
When the jail financing was being arranged, a request for proposals was conducted and Speer Financial was chosen to advise Knox County. Kevin McCanna, president of Speer, has dealt personally with this project as well as a number of other bond sales for both Knox County and Galesburg. When he was contacted Tuesday, McCanna was somewhat skeptical of Millers plan.
"Evaluating a bond refinancing is actually a fairly complex matter. We have looked that the rates currently available and have determined that only a small amount of savings could be realized by refinancing at this time. We also asked the bank that purchased all of the original bonds issued to evaluate the prospects of refinancing these bonds and they too said it wasnt really a feasible option. Our analysis indicates that a well-done refinancing program of fairly priced bonds might save almost two percent before costs."
McCanna estimated those costs at between $75100,000. "It is really only a marginal issue at this point and you only get one bite of the apple. That is, bonds like these can only be refinanced once and it is my feeling that a government body should net savings measurably in excess of all the financial and legal services costs before even considering such action."
When Miller was contacted Tuesday afternoon and told that McCanna was dubious of the prospects of his refinancing plan, he remained confident of his numbers. "Of course these are just spreadsheet calculations at this point and we would have to do a great deal more work to make my plan happen by December 15th but I am convinced that these low interest rates make it all possible and we need to take advantage of financial savings when the opportunity presents itself." Contrary to McCannas statement, Miller said that Knox County was free to refinance bonds such as these "whenever it is advantageous to do so."
Another financial professional (without ties to either Speer or the Treasurers race) contacted late Tuesday acknowledged that the current "rock-bottom interest rates make bond refinancing look very attractive until you consider the practical realities of the municipal bond process." Her point is that arranging for the sale of municipal bonds is a comparatively slow process where even minor volatility in interest rates can destroy any net savings unless the margin well exceeds 2.5 percent. "Thats a great political move but probably unrealistic in practice," was her parting analysis after faxing the written material from Millers press kit.
Without actually completing the refinancing process we can never really know for sure how much of a savings Knox County might reap from Millers plan. What is clear is that at least one local race just might hinge on substance rather than illusion.