ATLANTA -- North Carolina's Supreme Court has agreed to review a lower court ruling that the city of Concord can issue refunding debt in a greater amount than the principal being refinanced.
The high court's Aug. 14 decision allows Concord to bypass a state appeals court in seeking final validation for a proposed sale of $8.5 million of debt to advance refund $7.3 million of 1984 water and sewer bonds.
On June 19, Concord won the first round in its fight to gain this validation when Judge James C. Davis of the General Court of Justice, Superior Court Division, granted a summary judgment favoring the city's test lawsuit seeking to establish the legality of the transaction. That lawsuit, which named all citizens in Concord as defendants, had been filed in February.
City officials have argued that the refunding technique is authorized by a 1977 state law and could result in substantial savings for issuers throughout the state. Until this year, however, the law has never been tested in North Carolina courts. Larger-principal refundings have been used in a number of other states, including Georgia, Colorado, Pennsylvania, and Louisiana.
"We are pleased that we can go directly to the Supreme Court with this case and speed up validation of our bond issue, particularly given the current low interest rate environment," city Finance Director Kathy Combs said yesterday. "I am very optimistic about the outcome."
Charles C. Meeker, a partner at Raleigh-based Parker, Poe, Adams & Bernstein, Concord's bond counsel, said North Carolina's high court normally takes between three and six months to hear a case. He said there is a "reasonable" chance, however, that the court could respond to the city's request and rule by late November -- allowing Concord to take advantage of the current low level of interest rates to realize as much savings as possible in completing the refunding.
In a 16-page brief filed before the North Carolina Supreme Court on Tuesday, Concord's attorneys reiterated their arguments in support of the constitutionality of the 1977 law allowing the larger-principal refundings. The brief also stressed the technique's fiscal advantages for Concord.
The brief says the proposed refunding would save the city about $2 million, given current interest rates. And, citing the low rates, the brief also argues that if Concord issues refunding bonds in principal amount equal only to the outstanding debt, the escrow account would not be large enough to generate the income needed to pay off the outstanding bonds.
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 could cost the city between $9,500 and $19,000 per year in lost interest earnings, according to the brief.
"The larger principal approach to refundings avoids a barrier that otherwise might bar local governments from undertaking financially prudent refundings," the brief concludes. "Concord respectfully submits that the constitution of North Carolina should not be interpreted in a way which would create a barrier to financially prudent refundings."
A lawyer appointed to represent the named defendants contended that the financing is illegal -- and the 1977 law is unconstitutional -- because it allows local governments to contract new debt in excess of that previously authorized by voters.