Orange County plans to launch a $300 million commercial paper program today to refinance $123 million of “Teeter plan” variable-rate demand obligations insured by Ambac Assurance Corp. and to expand the program’s capacity amid surging property tax delinquencies.
Counties collect property tax payments for local governments in California. Under Teeter programs, a county gives local governments tax payments as they come due, regardless of actual payments from taxpayers. In exchange, the county earns the penalties and interest that accrue on the delinquent taxes. The program smooths revenue receipts for smaller local governments and earns money for counties.
Orange County, the state’s second-most populous after Los Angeles, has funded its Teeter program through a revolving fund that was seeded with $155 million of Ambac-insured VRDOs in 1995. About $123 million of the VRDOs remain outstanding.
Interest rates on the Teeter bonds have surged since Ambac lost its triple-A credit ratings, said Thomas L. Beckett, the county’s public finance manager. Rates that averaged about 2.3% before the credit crunch have spiked to over 7% at some recent remarketings.
The county is refinancing the long-term, variable-rate debt with commercial paper backed by a direct-pay letter of credit from Dexia Credit Local. It has authority and liquidity in place for up to $300 million, but it only expects to issue $178 million for now.
The county modeled its program after Riverside County’s Teeter program, Beckett said. “We like the flexibility of commercial paper because we can slide it up and slide it down,” as tax delinquencies rise and fall with the business cycle, he said.
The county also saves on liquidity costs by only paying the full letter of credit fee — 55 basis points — on the paper it actually issues. It pays a lower 35 basis point fee for the unused capacity it has reserved under the LOC.
Beckett said the county is taking on little credit risk by taking over as creditor on the delinquent property taxes because the properties are worth much more than the outstanding tax bills.
Lehman Brothers Inc. is the dealer for the paper. U.S. Bank NA is the paying agent.
The paper is rated P-1 by Moody’s Investors Service and F1-plus by Fitch Ratings. The county has also sought a rating from Standard & Poor’s, but it hadn’t yet received it at press time.
