A new California law allows counties participating in Teeter plans to issue long-term debt, with bond proceeds going to pay off property taxes that the counties owe local agencies.
The law is designed to resolve the timing gap between the maximum 15-month maturity for Teeter plan notes, which counties already were able to issue, and the roughly three years it takes to collect delinquent taxes that help secure the debt.
"I wish we could have had a bill when interest rates were lower -- we might have had a lot of issuances all at once," said Dan Wall, a lobbyist with the California State Association of Counties, a sponsor of the bill. "The market has changed, and maybe it won't let one of those financings happen in the near term, but the option is there."
Teeter plans, which have existed in California since 1949, permit counties to pay local agencies their full share of annual property taxes while the county retains the interest and penalties that result from the delinquent tax payments. Local agencies benefit from a stable cash flow and counties can receive a greater amount of property tax revenue.
Currently, counties participating in Teeter plans issue short-term debt, called Teeter notes, to meet ongoing obligations. Some counties rely on their own treasury pools for debt repayment.
The new law, which was introduced by Assemblyman Mike Gotch, D-San Diego, allows counties to issue long-term bonds, up to seven years, through joint powers agencies to finance their Teeter plan obligations as well as their unfunded pension liabilities.
Counties can issue the long-term bonds under California's Joint Powers Law or the Marks-Roos Local Bond Pooling Act, and distribute the proceeds to local agencies in lieu of the agencies' portion of property taxes and assessments.
In addition to resolving the problem that counties have in balancing the repayment of their Teeter notes against collection of their overdue property taxes, long-term bonds are more efficient and cost-effective, county officials say.
"A county which opts to use the Teeter plan must borrow on a taxable, one-year basis at higher interest rates than can be achieved through longer-term, nontaxable borrowing," said an Assembly analysis of the bill.
And by allowing joint powers agencies to issue bonds to finance unfunded pension liabilities, smaller public agencies can achieve economies of scale by selling pension debt together.
"Counties can do it on their own, but law had been silent as to whether they can do it in joint powers agreements," Wall said. "Now a bunch of small of counties can do [pension bonds], so the numbers make sense for them."
Last March, in a CreditWeek Municipal article, Standard & Poor's Corp. highlighted the problems that counties have in securing short-term notes with delinquent property taxes.
"It currently takes 36 months to collect 95% of the delinquent revenue stream, while note repayment must occur within 15 months of issuance," Standard & Poor's said.
"This limits a county's ability to maximize its borrowing capacity because it now must provide an additional source of funding to secure the notes," the rating agency said.
Last year, Orange County, also a sponsor of the new law, issued $215 million of taxable Teeter plan notes that matured on June 30, 1994. County financiers used a standby purchase agreement that it secured with the county's $6 billion treasury pool to cover the gap between the $215 million due at maturity on the six-month notes and the $85 million in delinquencies that the county expects to collect by them.
"Having the option of extending the note repayment period so that the delinquent taxes securing the notes are matched better with the repayment schedule lessens the need for counties to tap internal moneys to repay outstanding Teeter notes," the Standard & Poor's article said.
Despite the apparent merits of the new Teeter law, the state department of finance opposes it. The department's position is that counties may take on too much debt if they sell long-term bonds to pay off their Teeter plan obligations.
Wall contends that counties with Teeter plans have a demonstrated ability to pay.
"Their concern was an error on the side of too much caution where it wasn't warranted," Wall said about the department of finance. "The market is a check and a balance system ... A county wouldn't have switched to Teeter if they didn't have the funds to do it. Either the county has the internal funds or [it has] the credit rating to go externally to borrow."
Before last year, only a handful of California's 58 counties participated in Teeter Plan programs. In 1993, about 50 counties adopted Teeter plans -- joining the two already in the programs -- to take advantage of an opportunity created by the state's 1994 fiscal year budget package. Counties using Teeter plans could offset on a one-time basis the impact of California's $2 billion shift in property taxes from counties to school districts.
Standard & Poor's has estimated that the state lost an unexpected $400 million in revenues from counties suddenly switching to Teeter plans.
To attract the six counties that haven't yet adopted Teeter plans, the state association of counties has sponsored Assembly Bill 786 by Tom Hannigan, D-Fairfield, which would extend the opportunity until 1995. Now on the Senate floor, the bill will die unless it is heard by the end of today when California's lawmakers recess until Jan. 4.
