Federal Interest Rate Hike Could Have Significant Impact on County Budget

Huntsville, TN (2015-12-07) With a federal interest rate hike appearing more and more likely, the Scott County Commission Monday night discussed the impact the increase could have on the county’s budget.

Scott Gibson, Senior Vice President of Cumberland Securities spent nearly an hour Monday night discussing the county’s current financial situation and the impact a federal tax rate increase could have on the county’s future budget(s).  “The county currently has $35.6 million in debt,” commented Gibson.  Of the total, the lion’s share (62%) is financed with variable rate bonds, which are highly susceptible to shifts in interest rates. “In an ideal world, the numbers (fixed versus variable) would be reversed,” he added.  Through the years, the county has used variable rate bonds, which have historically offered attractive interest rates.  After the financial collapse of 2008, federal interest rates plummeted, resulting in variable rates on much of the county’s outstanding debt to drop below 1%.  Prior to the recession, much of the county’s debt was subject to interest rates of between 4% and 6%.  Accordingly, the county budgeted it’s debt with an estimated interest rate of 5%.  However, after years of historically low rates and pressure to hold tax rates following the loss of revenue from the hospital lease, the county began to apply a more realistic pen to its budget projections and lowered those estimates to around 1.25%.  As result, the county shifted nearly $1 million dollars from debt service to other areas of the budget.  “You made some good decisions.  You moved money around because it was prudent at the time,” Gibson remarked.  Unfortunately, all good things must come to an end.  “Now due to circumstances beyond your control, this county commission must do something about it,” he added.

Gibson outlined a couple of options for the county’s consideration—both would likely result in a hefty increase in the property tax rate.  In an effort to reduce the county’s dependency on variable rate debt over time, Gibson suggested the county should refinance up to $10 million in its long term general debt.  By keeping the refinance issue below the $10 million threshold, the county would likely enjoy a better interest rate.  If the debt were issued by mid-Spring, Gibson projected fixed interest rate on the bond issues would likely be around 2.80%, an increase of roughly 2.25% over the county’s current budget projection.  The difference, stated Gibson, would equate into about $130,000 annually or roughly 4.5 cents on the tax rate.  By refinancing the $8.5 million, the county’s ratio of variable debt versus fixed rate would be roughly 50/50.  In addition to the county general debt, Gibson suggested the county refinance about $1.5 million in rural school debt.  As result, 66% of the county’s debt would be subject to a fixed interest rate instead of the current 34%.

Gibson also discussed the possibility of refinancing the entire county’s current general debt or roughly $22 million.  At an assumed rate of 3.5% (higher because of exceeding the lending limit for bank qualified municipal bonds), the county would have to fund an additional $500,000 per year or 16.6 cents on the tax rate.

When combined with an estimated $400,000 budget shortfall already projected, the county would, if it chose to refinance all its general debt, face up to a $900,000 deficit or a 30 cent tax increase.

Even if the county doesn’t act to transition some of its debt to fixed rate bonds, it will have to consider budgeting additional funds to offset anticipated increases in its variable rate debt.  Gibson suggested the county shouldn’t forecast anything less than 3 to 3.5%.  He urged the commission to consider budgeting up to 5% per annum.

Either way, the county will have to make some very difficult decisions during the next budget cycle, which will begin in earnest by mid-March to early April.