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Interest rate on Mecklenburg's debt spikes

The interest rate on about a third of Mecklenburg County's debt rose to its highest-ever levels this week as the turmoil on Wall Street ripples across the country.

It marks the second week in a row that variable interest rates have spiked, prompting concern from some local governments about possible lingering effects on their budgets and construction projects if elevated rates persist.

But in perhaps a sign of good news, the variable rate on some debt that resets on a daily basis fell at the end of this week, and stood at 4.84 percent on Friday, said Sara Lang, a spokeswoman for the state Treasurer's office.

In Mecklenburg, the interest on variable rate bonds now ranges between 7.5 and 8 percent, compared to an average of 6.1 percent one week ago. Earlier this month, the rates stood at around 1.8 percent.

Last week's rate increase added about $600,000 to the county's monthly debt payment, said Finance Director Dena Diorio. About $715 million of the county's debt carries a variable interest rate, she said.

But Diorio said the county will be able to absorb the cost of the increase because the county budgets for a variable interest rate that is two percentage points higher than the prior six-month average to offset swings in the rates. She said county officials have not pinpointed a rate that would present a problem for the county budget.

“It's only been two weeks, and we don't expect it to continue for the whole fiscal year,” Diorio said. “But we have to keep an eye on it.”

The county has experienced brief spikes in interest rates before, including three weeks in 2000 when the rates rose to nearly 6 percent.

Across the state, concerns about the rise in interest rates have prompted some officials to call the Local Government Commission, which oversees and approves municipal debt sales, Lang said.

Most counties in the Charlotte region do not have construction debt that carries a variable interest rate. Another that does, Union County, also has seen its rates increase.

The state government itself must add about $1.4 million to its monthly debt payment because of the rate changes, Lang said, who also said the increase won't have an immediate impact on taxpayers. About $855 million in state debt carries a variable rate.

“We continue to hope that a federal action and the end of the quarter will help settle rates,” Lang said.

But Mecklenburg County commissioner Bill James said the recent spike highlights a much bigger problem. James said he contacted county staff a year ago, saying he was worried that the county had too much variable-rate debt.

“If you see a storm on the horizon, you don't just sit there and wait for the hurricane to hit and the levee to break and then say, ‘Oh, my heavens, what a terrible financial situation we're in,'” James said.

He said the recent rate increases, along with Thursday's call by Gov. Mike Easley for state agencies to cut their budgets by 2 percent because of sagging tax revenues, means the county has “a double whammy we have to deal with.”

The Local Government Commission generally wants municipalities to keep variable rate debt between 10 and 20 percent of total debt, but Lang said some AAA-rated governments, like Mecklenburg, could go higher than that without hurting their credit ratings from bond agencies. She also said other factors and policies can affect the variable-rate risk.

Diorio said the county's rating agencies are satisfied with the amount of variable debt the county has. She said officials aren't planning any immediate changes because of the recent increases, but said if the market is still rough by the time the county puts more bonds up for sale in January, they could decide to either seek only a fixed interest rate or delay the transaction.

“(But) we think it's a temporary situation,” Diorio said. “We're certainly not going to make any long-term decisions based on two weeks worth of data.”

Staff writer David Ingram contributed.
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