DPW may go with Build America Bond

July 24, 2009
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The Kent County Department of Public Works plans to price some bonds in a few weeks to finance the construction of its new materials recycling facility to be built at 977 Wealthy St. SW.

But this time, the bonds that DPW will take to the market may not be only the standard tax-exempt securities municipal leaders have long relied on to finance public projects. The department is seriously considering two types of bonds.

One is the typical tax-exempt government bond that has always appealed to wealthy and institutional buyers who need to reduce their tax liabilities. The other is the Build America Bond, a relatively new public financing option that was included in the American Recovery and Reinvestment Act passed by Congress in February.

The BAB, as the bond is called, is a taxable security governments can sell through 2010. Federal law also allows states and local units to offer it with a tax-exempt bond as long as each one is in a separate identifiable series.

“All the way up to the date of pricing we can decide if all of it might be the Build America Bond, some of it, or none of it, or how much of it would be the traditional tax exempt. If we go with part tax exempt and part taxable, then we have to separate it into two series of bonds,” said Robert White, Kent County fiscal services director.

Should the BAB be chosen, whether for all or part of the issuance, that choice will mark a first in a lengthy record of county financing.

“Historically, we’ve always issued tax-exempt bonds and they’re triple tax exempt, depending on where you live. They’re exempt from federal, state and local income tax,” said White.

But if the DPW does go with the BAB, the department will have to offer a higher interest rate to induce buyers because of the bond’s tax liability.

Although the rate isn’t known yet and won’t be until pricing occurs, White estimated that the DPW will have to pay buyers between 6 percent and 6.5 percent to purchase the BAB and about 4.5 percent for the tax-exempt municipal. Even with a higher payout requirement for the BAB, though, the DPW has two solid reasons to go to market with it.

“What happens is, every six months when we go to pay interest to the bondholder, we would file a reimbursement request with the U.S. Department of Treasury. And they would pay us 35 percent of the interest that we are going to pay to the bondholder,” said White.

“The 35 percent is the uniform rebate percentage, and that’s intended to bring them back to the equivalent of a tax-exempt issue.”

In addition to the federal reimbursement, White said the BAB would give the county access to a group of buyers that municipalities regularly haven’t been able to reach with tax-exempt securities. It’s a large group that doesn’t have the deep financial pockets of the usual tax-exempt buyer and doesn’t need the tax break as badly as a buyer of municipal bonds.

Forbes magazine called the BAB a “boon for investors.” The magazine told readers to disregard the taxable status and put the bonds into their retirement plans or IRAs.

“It’s great for your IRA because not only is the coupon interest tax-deferred until you are likely in a lower tax bracket, but it can also be reinvested, meaning it can compound. Plus, you get your principal back at maturity,” wrote Barnet Sherman in a Forbes column.

“Investor enthusiasm for the initial bonds quickly pushed prices up, nearly 8 percent in some instances. That’s unlikely to persist, as more bonds come from different borrowers and different credit classes,” added Sherman.

But Marc Lichtenfeld, a senior analyst with Smart Profits Report, told investors to look at taxable corporate bonds, as well as the BAB.

County commissioners recently authorized the DPW to issue bonds worth up to $13.5 million for a 20-year term. But the actual value of the issuance will likely be closer to $12 million. DPW Director Doug Wood said he was waiting to get the last of the construction bids and hoped to have a final cost by the pricing date. Payments to the bond buyers would come from landfill fees and recycling revenue the DPW receives.

Groundbreaking for the new recycling center will be held Aug. 20.

The county’s triple-A bond rating was renewed for another year in April by Standard and Poor’s and Moody’s Investors Services, a rating the DPW will use for the sale. Citigroup Global Markets Inc. is the underwriter. Closing is tentatively set for Sept. 1 and pricing is planned to take place Aug. 13, if a firm construction cost is known by then.

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