By Madison City Council President Bill Holtzclaw

My first reaction when informed at a meeting on Wednesday afternoon that Madison’s interest free loan was not really interest free was to withdraw my support for accepting the loan and associated sales tax increase to repay the loan.

Over the past several weeks I had helped lead our city down a path where, through raising a half-cent sales tax we could secure a $36M loan from the state and pay back only the $36M borrowed. And now I’m told there is an interest rate – no way, I’m out…but then, I took a deep breath and decided to take the time to understand how our interest free loan will potentially have an interest rate associated with it…and I ask that readers of this essay do the same.

First, contrary to what some have suggested – we did not go down to the Alabama Dept of E-Z Loans and ink a deal where at the last minute someone slipped in an interest clause on the back page that we didn’t read…thank you for allowing me that moment of comic relief - if only it were that simple!

Seriously, following is what we learned at our meetings with the state financial advisors this week. Part of this has been submitted to the press but as they are limited in print space/air time, some of the details were not included. In short, we learned that improving conditions in the current market have resulted in the need for a supplemental interest coupon to be added to the Qualified School Construction Bonds. This is a new development and was brought to our attention only Wednesday by the Assistant State Superintendent, after the first set of Alabama Qualified School Construction Bond issue was sold in the market earlier this month. It is important to note that this is not a case of fact omission by any party but rather a case where this is the first time Alabama has participated in a transaction such as this.

For background, competition is a good thing when a bond is presented for purchase in the market as it is essentially an auction; the more buyers the better the final price. These bonds failed to attract the attention needed because of the Tax Credit Rate associated with the bonds had fallen…this is where things get confusing. A business will buy bonds with a tax credit rate in order to reduce the amount of taxes they pay back to the government – hence “Tax Credit”. The bond must have an acceptable yield in order to be attractive – a breakeven point if you will and an aspect of this loan that we simply knew nothing about until this week.

The yield on these bonds is pegged to a tax credit rate. The tax credit rate is set by the U.S. Treasury through the Internal Revenue Code (IRC) which provides rules for the issuance and use of qualified tax credit bonds - including Qualified School Construction Bonds. The rate was above 7% in August of this year but as the overall market conditions improved, the rate was adjusted downward, breaking below 6% in late September. The rate has hovered at or near 6% over the last 60 days. Visit the Treasury website at https://www.treasurydirect.gov/GA-SL/SLGS/selectQTCDate.htm and observe the current daily rate and subsequent trends.

For most businesses able to participate in purchasing these bonds, the breakeven point is around 7%; hence the first set of bonds sold in early December required approximately a 1% supplementary coupon to make up the difference between the tax credit rate and the breakeven point for the bonds to be attractive to buyers. Remember a 7% rate is considered breakeven so - in truth, these were zero percent bonds back in August as, had they been brought to market they would have required no supplemental coupon.

Lastly, and I’m not suggesting this will happen but it is an option, a final deal has not been done – Madison has not signed a loan; the final pieces of this loan “deal” are still being worked out and we have the option to walk away. The state told us they could provide access to a$36M loan provided we are able to show a revenue stream to repay the loan. We upheld our end of the deal through the ½ cent sales tax increase – we have a means to repay the loan. So at this point we have two of the three entities in place - the state and city ready to move forward with a deal. The third party is the financial markets. We will not know what the Tax Credit Rate will be on these bonds until they go to market in Feb/March of next year. That is when we will know what, if any supplemental coupon - or interest rate - will be required to make the bond issue attractive to buyers.

What we do know at this point is that after having closely looked at our projected revenues from the 1/2 cent sales tax increase recently passed by council, we are confident that essentially nothing has changed for Madison residents in that should we move forward with the loan we will be able to make the scheduled debt payments, to include any interest payment requirement, from this revenue stream. All aspects, including the sunset clauses remain the same.

My hope is that this essay helps residents better understand the process before us. As always, I will continue to provide updates as they become available. I truly appreciate the constructive feedback from those who do not simply jump to conclusions.