County to securitize VLF repayment promise

The County of San Diego will securitize the promised repayments by the State of California for revenue taken from the Vehicle License Fee.

The 5-0 Board of Supervisors vote February 9 authorizes the sale of the county’s VLF receivable to the California Statewide Communities Development Authority (CSCDA) for a minimum sale price of $56.6 million, approves a plan for the use of the money, and establishes appropriations with the anticipated revenue.

The $56.6 million will provide cash financing rather than debt payment for a $33 million integrated property tax system, freeing up for other county uses $13 million previously set aside for the initial payment while avoiding $2.6 million in annual debt service payments over 20 years. The remaining $24 million will be used to reduce the unfunded liability of the San Diego County Employees Retirement Association, which by increasing the funded ratio will reduce the county’s future contributions.

“The bottom line is it’s going to save the taxpayers some money,” said Donald Steuer, the county’s Chief Financial Officer.

During fiscal year 2003-04 the county made an involuntary loan to the state of VLF revenue. An agreement between the state and local governments resulted in subsequent state legislation which requires the state to repay the revenue by August 2006. The amount to be repaid to the County of San Diego is approximately $60 million.

The repayment depends on various factors, and local governments have no assurance that all or even some of the required repayment will be returned to the local governments.

“I don’t know if anybody is holding their breath for the state to make good,” said Supervisor Greg Cox, who is also currently the president of the California State Association of Counties.

The repayment legislation also authorized the securitization of the VLF receivables. The securitization program is sponsored through the California State Association of Counties and the League of California Cities, and CSCDA will issue bonds to purchase VLF receivables from local governments. Those bonds will be repaid by the state directly to bondholders, who have no recourse if the state does not repay the involuntary loans.

“It eliminates the uncertainty of timely repayment by the state,” Steuer said.

Because of that bondholder risk, the interest rate for the bonds is expected to be higher than the rate for most government bonds. The county expects a 94 percent yield for the $33 million of bonds to be sold on a tax-exempt basis and a 92 percent yield for the $24 million of bonds sold on a taxable basis. That produces a total yield of 93.1 percent, or $56.6 million. If the minimum sales price does not meet the $56.6 million threshold, the county will not proceed with the bond sale.

The local governments must specify tax-exempt or taxable use for the bonds. The county also must commit to participation in the first round of the program by February 18 in order to receive the proceeds in March 2005.

In addition to eliminating the uncertainty of timely repayment, the securitization also provides up-front cash for one-time needs and creates opportunities for near-term debt management. “This is really, in my opinion, kind of a no-brainer,” Cox said. “We actually will be saving the taxpayers of the county money over the next few years.”

County general fund money will be used to pay the $5,000 application fee to cover the required tax analysis.

Avoiding the $2.6 million annual debt service for the integrated property tax system will save $28 million in interest payments. “This is an excellent move on behalf of the taxpayers,” said Supervisor Dianne Jacob. “It’s a very smart move. It’s a good deal. It’s a good business decision.”