MONROE Union County is seeking state approval to restructure several bond deals and get out of a plan that it considers too risky to maintain in the current volatile market.
The change has big upfront costs. The county needs to pay about $21 million to shed the bond plan, and will see an estimated net loss of $4.2 million over the remaining 16-year life of bonds that were mainly used to build schools.
But if the county did nothing those losses could potentially be much greater, County Manager Cindy Coto and Finance Director Jeff Yates said.
At issue are financial instruments called “interest rate swaps,” a complex agreement between two groups looking to find cheaper borrowing rates by exchanging the type of rate they are using.
“Our concern is we are exposing the county to risk in a very uncertain market” with these swaps, Yates said. Others share that concern.
Charlotte and Mecklenburg County have paid more than $40 million to get out of some of their swaps since 2008. Greensboro, Fayetteville and Guilford County have each paid millions to terminate swaps as well.
In Union County, officials had $94.8 million in bond issues with variable rate plans from 2004 and 2007 that were involved in six swaps. The county had agreed to exchange them with banks for fixed-rate plans to hedge against future interest rate hikes.
At the time, the county felt the benefits outweighed the potential risks, Coto said. Most of the bond money was aimed at school construction during a period when Union County was one of the fastest-growing counties in the nation.
At first, swapping interest rates worked out, and has saved the county about $2.2 million.
But during the 2008 and 2009 financial crisis, the county’s swap costs shot up, resulting in unanticipated costs of $2.1 million. Those costs were among the factors that forced the county to lay off 88 employees in spring 2009.
Meanwhile, interest rates began tumbling to historic lows, leaving the county locked into the higher fixed rates.
More risks loom now, Yates said, including the potential for banks to charge higher fees for swap renewals or that Congress might change the tax law and fundamentally alter the municipal bond market.
Union County caught a break, however, because it has a ready source of money to use for terminating its swaps.
About a year ago, the county received a one-time payment of $54 million from Carolinas HealthCare System following renewal of a lease for CHS to run the county’s hospital.
Union County is fortunate it can use those funds to get out of the swaps, county commissioner Jonathan Thomas said at a meeting on the issue last week. “No doubt (ending the swaps) is the right thing to do,” he said.
The county continuously monitors its portfolio and does not believe other changes are needed at this time, Yates said, although that could change based on market conditions.
Union County still has three additional swaps. Coto and Yates said it was too cost-prohibitive to terminate them, and their structure was different from and less risky than the ones they are ending.
Commissioners unanimously approved the plan to terminate the six swaps. They also authorized a more common step called “bond refunding,” similar to refinancing a mortgage, that involves borrowing new money to pay off existing debt.
After the swaps are terminated, Union County is combining the 2004 and 2007 bonds into a single package for a refunding with a fixed rate. It also is refunding two other bond series, and that move will save a combined $3.2 million over the life of those issues.
None of the moves will affect the tax rate. Commissioners will hold a public hearing Jan. 22 on the changes, and intend to do the refundings about a month later.
The plan also needs to be approved by the state Local Government Commission. Coto said the commission has been encouraging about the county’s decision.
In an email interview, state Treasurer’s Office spokesman Walton Robinson said the commission has viewed swaps cautiously.
He noted that the commission requires governmental entities to adopt a swap policy and receive education about their risks before approving them.
Approximately 25 of more than 700 governmental entities in the state have used swaps since summer 2003, when the state began regulating entities’ swap participation, according to the commission. Staff writer Andrew Dunn contributed
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