LOS ANGELES -- Most California counties fund their so-called Teeter plan obligations -- an alternative property tax distribution method -- through internal borrowings, but Sonoma County is breaking away from that tradition by conducting an external borrowing.
Sonoma County auditor-controller Rod Dole said yesterday that the scheduled pricing today of $21.5 million of tax-exempt Teeter plan tax and revenue anticipation notes should result in lower interest rates than if the county borrowed from its own treasury pool.
The notes, which mature June 30, are rated SPl-plus by Standard & Poor's Corp. and MIG-1 by Moody's Investors Service.
The property tax distribution method, commonly called the Teeter plan, was used by only a handful of the state'S 58 counties until last year, when the state legislature provided a financial inducement for counties that adopted the plan for the first time. Now most counties use the Teeter plan.
The plan is an alternative to the traditional method of property tax allocation, in which the county allocates to each taxing entity its share of current property taxes as they actually come in, and then allocates delinquent payments and penalties later.
Under the Teeter plan, county auditors send each local government 100% of the revenues it is entitled to receive. Then the county collects and keeps the delinquencies and penalties. Counties like the Teeter plan because the cost of borrowing money to pay the local agencies is less than the interest and penalties on the unpaid property taxes. When counties finally collect the back taxes, they make money.
To establish the Teeter plan, counties need to find a source of money to pay out the tax levy to the taxing entities.
Sonoma County, like most counties, funded its Teeter plan involvement in fiscal 1994 through an internal borrowing from its treasury pool.
For fiscal 1995, most counties again funded their Teeter plan obligations through internal borrowings. However, Sonoma County plans to issue today "a tax-exempt short-term note at a lower interest rate" than would be available from the county treasury pool, Dole said.
In fiscal 1994, Sonoma County "paid the treasury pool rate, which was about 5 1/4%" when it opted into the Teeter plan for the first time, Dole said.
When the pricing is completed today, "we expect to come in somewhere in the low 4s," Dole said. "So, basically we're expecting we would save at least 100 to 125 basis points" by the capital market financing approach, he said.
The tax-exempt structure will enable Sonoma County to achieve significant interest cost savings over the county's own internal borrowings, or if it had to go to the taxable market, Dole said.
"Counties like Sonoma who have done the internal borrowings at one point in time thought they were the most cost-effective way of doing it," said Barbara Lloyd, a vice president with Leifer Capital, the county's financial adviser.
"But, they have seen their own returns on their pools rising, and that increases their cost Of funds for their Teeter borrowings," Lloyd said. "This is an opportunity to essentialty go taxexempt when their pool borrowings are costing them higher interest rates.
David Leifer, a Leifer vice president, said he expects more counties in fiscal 1996 to go to the capital markets for their Teeter plan financings.
The handful of counties that issued Teeter notes last year did so on a taxable basis.
Now, "there has been a change in the bond counsel and tax counsel analyses of the Teeter note structure which is allowing Sonoma County to finance its Teeter plan advances on a tax-exempt basis," Leifer said.
In Sonoma County's case, the taxexempt status is permitted because the notes are being issued under California's tax and revenue anticipation note statutes, which allow tax-exempt financings for less than 15-month maturities.
Teeter plan financings that go beyond that maturity apparently would be taxable under federal tax rules.
Bond counsel firms, to date, have not offered opinions that tax-exempt financings can occur over more than one year, Lloyd said. Last year, the handful of external borrowings for Teeter plans were taxable deals.
Linda D'Onofrio, tax counsel for Jones, Day, Reavis & Pogue, special counsel to Sonoma County, said the transaction qualified for tax-exempt status.
"When the first Teeter notes were issued, many bond counsel firms believed any delinquent tax advances were investments, rather than expenditures, and could only be financed with taxable notes," Leifer said.
"Now some bond counsel firms are allowing tax-exempt borrowings for the current year's advance only -- again, based on the argument that it is an annual obligation of the county rather than an investment," Leifer said.
But those bond counsel still believe the earlier year's delinquent advance should be excluded from the tax-exempt borrowing because they argue the borrowing was an investment made by the county at the time it elected the Teeter plan, and is therefore taxable, Lloyd said.
Lloyd said by considering the advance of both current year and prior year delinquencies as an illiquid investment, Sonoma County was able to create a borrowing structure that allowed the county to income tax-exempt Teeter notes for their entire outstanding Teeter advance.