LOS ANGELES -- Orange County, Calif., plans to sell $215 million in taxable short-term notes as early as next week to finance the county's change to an alternative form of property tax distribution to local governments.
Known as the Teeter plan, the alternative tax allocation method is used by only five of the state's 58 counties, although it has been in California's revenue and taxation code since 1949.
Orange County is reportedly one of at least eight counties that will participate in the Teeter plan for the first time this fiscal year. In addition, about 10 small-size and medium-size California counties are considering using a pooled financing under the plan.
Under the plan, a country provides local entities with their full tax levy up front rather than just giving them actual collections. In exchange, the county collects late taxes and the penalties that accrue on delinquent payments.
Proceeds from the note sale will enable Orange County to give each participating entity a 100% share of its fiscal 1994 levy, and also will allow the up-front distribution of each jurisdiction's share of delinquent taxes from prior years.
A recent surge in interest in the Teeter plan was sparked by California's Senate Bill 742, signed into law in July by Gov. Pete Wilson. Under the measure, counties adopting a Teeter plan this fiscal year receive a one-time credit in connection with a recent state-mandated property tax shift from local governments to schools.
Matthew Raabe, Orange County's assistant treasurer, said county supervisors approved participation in the Teeter plan before Wilson signed S.B. 742. The legislation "was a very pleasant surprise, but it didn't impact our decision," Raabe said.
Orange County, the state's third most populous county, is expected to be the first to sell Teeter notes externally, market participants said.
"Most counties with Teeter plans issue notes that are funded internally through borrowings from their own treasury pools," Raabe said. Orange County "choose an external financing because it can borrow at a lower rate than it can reinvest. So it didn't make sense for us to fund the Teeter notes out of our [treasury] pool."
Orange County's treasurer-tax collector will choose an underwriter to place the bonds shortly before pricing. The pricing is expected during the first two weeks of November, depending on market conditions, said Jeffrey Leifer, president of Leifer Capital, the county's financial adviser.
Reflecting the strength of Orange County's borrowing capabilities, the Teeter notes were rated P-1 by Moody's Investors Service and A-1-plus by Standard & Poor's Corp. The notes will mature June 30.
Standard & Poor's said the notes are general obligations of the county.
The Teeter notes are payable from available fiscal 1994 funds. They are secured first by delinquent taxes, associated penalties, and interest to be received during the current fiscal year, which began July 1.
Raabe said the county will start a note repayment fund where the pledged delinquent taxes and penalties will be placed.
By June, however, when the notes mature, the county expects to have only about $85 million in its note repayment fund.
"The shortfall will be addressed through a standby purchase agreement under which the [county] treasurer, as manager of the county's $6 billion investment fund, is unconditionally obligated to purchase the remaining notes as investments for the fund," Standard & Poor's said in a release.
"Using the investment pool gives us some extra comfort they won't be cutting themselves short on liquidity," said Robert Swerdling, a vice president of Standard & Poor's.
The county expects to repay the investment fund and to finance further tax delinquencies by selling another series of Teeter obligations at the beginning of the next fiscal year.
Moody's said the "highest quality security for the notes reflects various layers of protection which the county has provided."
Although the notes are being sold as taxable obligations, the interest is exempt from California's personal income tax, according to the preliminary official statement.
Under a working capital analysis, "it is necessary to establish whether proceeds are spent" to determine tax-exempt status, said Jean M. Costanza, a partner of Buchalter, Nemer, Fields & Younger, the county's bond counsel on the deal.
Under current Internal Revenue Service regulations, "it is not clear that such proceeds would be deemed spent upon allocation or distribution of the delinquencies to the Teeter plan participants," Costanza said.
Raabe said the county chose a taxable short-term note to implement the Teeter plan because "it takes so long to get an IRS ruling" on tax-exempt financing applications.
He said that Orange County is studying whether "we can go tax-exempt in future years."
Leifer, the financial adviser, said he has received expressions of interest from about 10 small-size and medium-size California counties interested in using a pooled financing under the Teeter plan.
The Teeter plan is designed to benefit local governments and the county, Raabe said.
Under Orange County's existing property tax collection system, the county collects tax levies on behalf of 180 taxing entities. The total levy is apportioned among all the entities.
However, the taxing entities do not receive 100% of their tax levy because of delinquent taxpayers who fail to make semiannual property tax payments.
"If taxpayers are delinquent, a taxing entity won't receive the entire amount of its levy from the county until the taxpayers make their payments," Raabe said. The entities often do not receive their complete tax levy until five years have passed because of California foreclosure statutes.
By contrast, taxing entities that participate in the Teeter plan will receive 100% of their current-year tax levy, even if some taxpayers are delinquent in their tax payments.
Presumably, this guaranteed cash flow will help the taxing entities with their budget forecasting.
Orange County also gains under the Teeter plan, Raabe said.
By providing the taxing entities with their full tax levy up front, the county gets rights to any future claims on the delinquent property taxes.
"In effect, the county is buying their delinquencies," which have value because delinquent payments are penalized 1.5% per month, or 18% a year, Raabe said.
"Because of the penalties we will collect, in the first five years of the Teeter plan the benefit to the county works out to $3 million a year in increased revenue to us," he said.
Some local governments in Orange County have determined "it isn't in their best interest" to use the Teeter plan, Raabe said, so both the current system and the Teeter system will be utilized simultaneously.
Under S.B. 742, the same amount that Orange County is advancing to the school districts this fiscal year -- $57 million -- will not have to be shifted to schools as part of the state's recent property tax diversion.
Raabe termed the advance a windfall of sorts for the districts, which under the current tax collection system might wait "as long as five years to collect" the full tax levies due them.
In related development, San Diego County recently received court validation for a five-year taxable note to fund its Teeter plan delinquencies, said William J. Kelly, county assistant auditor and controller. The county plans either to go to market in January or to borrow about $100 million internally, he said.
David Hitchcock, a director of Standard & Poor's said several areas have property tax-related financings. including Michigan counties, which issue delinquency-related tax notes, and Florida counties, which have individual tax notes.
Such financings are "more uncommon than common," Hitchcock said. He doubts they will rocket in popularity because "the amount of money we are talking about is small enough that [such participation] is not the first priority of a lot of municipalities.