ATLANTA -- North Carolina's Supreme Court last Friday gave Concord, N.C., the green light to sell a refunding issue that is larger in size than the debt it refinances.

The ruling comes 10 months after Concord filed a test case to validate a technique that the city argued was authorized by state law and could result in substantial savings for local governments throughout North Carolina. Larger-principal refundings are useful when interest rates have dropped such that issuers would otherwise be forced to add cash to the escrow account to generate enough income to pay off the debt being refinanced.

"We are ecstatic about winning this case and feel that taking the time and effort to pursue it will pay off enormously for taxpayers," said Kathy Combs, Concord's finance director.

Ms. Combs said the city will now move ahead with a competitive sale of general obligation bonds to refund $7.3 million of outstanding water and sewer debt sold in 1984. She said Concord hopes to sell the bonds before the end of January.

Although Ms. Combs said the city has not yet been able to calculate the savings under current interest rates, she noted that this summer the city's financial advisers estimated a sale of $8.5 million of refunding bonds would achieve present value savings of about $2 million given the level of rates at the time.

She said the advisers had also determined that if Concord could only sell $7.3 million of bonds and were forced to add some of its own cash to the escrow account, it would forgo between $9,500 and 19,000 per year in lost interest earnings.

"This gives local governments the ability to do economically advantageous refundings," said Blair Levin, a partner at Parker, Poe, Adams & Bernstein, Concord's bond counsel. "It's a good thing not only for Concord, but for other issuers in North Carolina.

"There have been other cases that have touched on this, but this is th first time this issue has been directly addressed by a state high court," he said.

In validating Concord's proposed refunding issue, North Carolina's Supreme Court affirmed a lower court decision in favor of Concord handed down by Judge James C. Davis of North Carolina's General Court of Justice, Superior Court Division, on June 27. Judge Davis's decision followed a lawsuit filed by Concord in February that named all the citizens of Concord as defendants, seeking to establish the legality of the transaction under a 1977 state law.

The high court agreed with Judge Davis, holding that a refunding issue larger in size than the bond issue being refunded does not constitute new debt and therefore does not require voter approval.

"We hold that the plain words of the Constitution of North Carolina allow the General Assembly to provide for the issuance of refunding bonds in this case," the high court held. "No requirement that the refunding indebtedness be less than or equal to the outstanding indebtedness appears in the constitution and we decline to impose one."

Mr. Levin said that although he expects other issuers to follow Concord in selling larger-principal refundings, a rush to bring these deals to market is unlikely, at least right away.

"If the ruling had been handed down two years ago, we would have seen a lot of these offerings," he said. "But now, because most issuers have already done their refundings, we will probably have to wait until the next interest rate cycle before a large number of issuers take advantage of" the ruling.

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