ATLANTA -- A state court judge ruled Monday that Concord, N.C., can refund debt in a greater amount than the principal being refinanced.
The ruling gives the city a green light to sell $8.5 million in debt to advance refund $7.3 million in 1984 water and sewer bonds.
But city officials, who say the financing tool could result in substantial savings for state issuers, are seeking to appeal the decision to the North Carolina Supreme Court in order to guarantee the ruling's validity. The refunding technique, which was authorized by state law in 1977, has until now never been challenged.
Judge James C. Davis of the General Court of Justice, Superior Court Division, granted a summary judgment favoring the city's contension that the proposed deal is legal, and that the 1977 law is constitutional.
The ruling comes three months after Concord filed its lawsuit naming all city property owners as defendants.
"We are pleased with the judge's action," Cathy Combs, Concord's finance director, said yesterday. "At this point, everyone here feels it would not only be in Concord's best interest, but in the best interests of other cities and counties in the state to test this [the 1977 law] through the appeals process."
Ms. Combs said the city would not go to market with the refinancing before the matter is heard by the state high court. Because the 1977 law has never been tested in the courts, she noted, North Carolina's treasurer has discouraged issuers from employing refundings that are larger in size than the issue being defeased.
Concord's finance director said that because current interest rates are so much lower than the average interest cost of 10.04% that the 1984 bonds carried, the transaction would save the city about $1.7 million.
Ms. Combs also claimed there would be an additional advantage to the proposed deal. If Concord issues refunding bonds in principal amoung equal only to the amounts of the outstanding debt, she said, the escrow account would not be large enough to generate income to pay off the outstanding bonds because of the low level of current interest rates.
Accordingly, the city would be forced to add some of its own cash to the escrow account -- and in so doing, give up the opportunity to earn a higher rate of interest outside the escrow. This, she said, could cost the city between $9,500 and $19,000 per year in lost interest earnings.
Judge Davis ruled Monday after a two-hour hearing featuring statements from the city's lawyers and court-appointed counsel for the defendants. The judge will follow his oral ruling with a written judgment in the next several days, a court official said yesterday.
During the hearing, the defendants' lawyer contended that the financing is illegal and the 1977 law unconstitutional because they allow local governments to contract new debt in excess of that previously authorized by voters.
The city's lawyers countered this claim, arguing that Article V, section 4 of North Carolina's constitution specifically exempts refundings from the referendum process.
The lawyers also noted that in at least two cases -- one in 1932 and the other in 1938 -- the state's high court has held that local governments have the authority to refund their debt service obligations without a referendum, even though the refunding increased the total debt service.
Concord's lawyers maintained that the refunding will actually decrease total debt service payments because savings on interest would outweigh the increase in principal to be repaid.
They said that under current interest rates the $13.17 million in debt service that would be paid on the refunding bonds -- $8.24 million in principal and $4.93 million in interest -- is $1.74 million less than the $14.91 million in debt service on the outstanding bonds, which combines $7.26 million ibn principal and $7.65 million in interest.
Blair Levin, bond counsel to Concord and a partner at the North Carolina law firm of Parker, Poe, Adams & Bernstein, said that if the case is taken up directly by the state's high court, it could be heard in the fall session, allowing for a possible judgment this year and a sale before 1992.
If an expedited hearing before the state Supreme Court is not possible, Mr. Levin said, the case would be first considered by North Carolina's Court of Appeals. This could delay possible ruling by the high court until late 1992, he said.
