Jail financing options | Eastern North Carolina Now

    Publisher's Note: This article originally appeared in the Beaufort Observer.

New BOC could kill the project with Limited Obligation Bonds

    In the August Board of County Commissioners' meeting the board heard a report from its Finance Officer, Jim Chrisman, on the various alternative methods for financing a "public safety facility" now that the U. S. Department of Agriculture has refused to finance the project. In the video below you will hear a very clear and concise review of those options by Mr. Chrisman. We think the presentation speaks for itself and will defer to the presentation in explaining the three opitons: General Obligation bonds, bank Installment Purchase Purchasing and Limited Obligation bonds. You will see in the video the 4-3 vote at the end to pursue Limited Obligation bonds.

    What is not clear in the Q&A before the vote is the response to Hood Richardson's question of "what happens after the election if the new Board decides not to appropriate funds to pay the debt?"

    We've done some research on that issue and the best, most concise information is an article published by the School of Government by Kara Millonzi, one of their local government experts. You can read the article by clicking here.

    What you learn is the answer to Mr. Richardson's question can be simply stated. There is nothing to prohibit a new board from refusing to continue to appropriate money to service this debt. In that event the property that was pledged as collateral can be "foreclosed" on by the bond holders. They get the property, including the improvements (buildings etc.) on the property. The law is explicit in saying that the county is not obligated beyond the limited obligation of the property being seized by the creditors. It says no "deficiency judgment" may be entered. That means that if the value of the property does not cover the amount of the debt owed the bond holders are stuck with the deficiency.

    The case cited in the article from Wayne County also makes it very clear that limited obligation bonds obligate the board only to pay what is appropriated each year and if the board chooses not to do so they cannot be ordered to use their taxing authority to service the debt.

    This means that if a new board elected in November decides to kill the project in December or afterwards then they can do so by simply refusing to appropriate the debt service and give the collateral to the creditors. Indeed, that is why this method is called "limited obligation" financing.

    In a General Obligation bond the board cannot choose to not appropriate the debt service. It must appropriate debt service before making appropriations for other things. Thus, the County Manager was correct. "You can't default" on a General Obligation bond, but he was not correct in implying that a future board cannot refuse to appropriate funding for the debt from limited obligation bonds. It can kill the project and one authority we talked to, who did not want her name used, said: "It may even be that a governing unit could refuse to fund the debt and it is not considered a default because it did not violate the terms and conditions of the debt."

    We were also told that "it is highly unlikely the Local Government Commission would approve a limited obligation bond knowing going in that a majority could be expect to kill the project. I don't see that happening," she said.

    Another issue we asked about was the spending the current board is doing now on this project from current fund balance. We were told that if the board has entered into a contract for services and has issued purchase orders prior to permanent financing being arranged that they are bound to those obligations regardless of whether permanently financing is obtained. In the video that is what Hood Richardson is talking about when he suggests they should stop spending fund balance until they know permanent financing will replace it. He suggests that the board should at least put the project on hold until they know they have financing for it. You will note in the video that the Gang of Four refused to do that and proceeded to incur even more non-financed spending.

    Obviously, the Gang of Four is operating on an assumption that they can get the next board so obligated that it will continue the project. But with at least two of the candidates pledging to stop the funding, it could very well result in putting the county in a tight financial position if the fund balance that has been spent is not replenished by permanent financing.



    Commentary

    We have a mess on our hands. The Gang of Four has put the county in a terrible position. We can envision the county finding itself in the next budget of not having enough fund balance to even carry its cash flow to keep checks from bouncing if the jail project is killed. But if the new board continues with the project it will solve the fund balance problem but cost the county as much as $50 million (principal and interest) on a 25-30 million dollar project.

    The absurdity of this situation the Gang of Four has created is that it could have been avoided by simply waiting until December to spend any more money than it would take to get a clear reading on how much the project is going to cost. We can understand anyone who wants a new "public safety facility" thinking that you need enough planning to know what it would cost but we simply do not understand why these four men would spend any more than that until they knew the project is going to be completed. We view their action as terribly irresponsible and we think each of them should be held personally liable for malfeasance if this thing turns out the way it looks like it is going to go down.

    Finally, we would comment on Al Klemm's assertion that Craven County is spending only $40,000 to deal with their jail being located 11 miles from their courthouse. That number is, on its face, absurd. That's the cost of one van, with no driver or guard. We understand Craven uses six vans and one source tells us they have at least four vans and six people who are necessary to meet the needs of transporting prisoners and personnel back and forth. What our source told us is that "we don't even know how much it is costly us because we don't isolate those expenses." But what is obvious is that it takes more than $40,000. Just imagine for a moment what kind of bids we might get from local businesses to transport prisoners back and forth to Chocowinity from the Courthouse. We doubt there is a sixth grader in our schools who would suggest you would get any bids if you offered $40,000.

    We would suggest that this is but yet one more example of Al Klemm's disingenuousness or his utter ignorance. This man is a joke. He has done more harm to Beaufort County than anyone we know, except perhaps Jerry Langley. He should hang his head in shame and go ahead and resign.