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INTEREST RATES The Board reviewed a Memorandum of February 8, 1995: TO: Members of the Board of County Commissioners DATE: February 8, 1995 SUBJECT: INTEREST RATES - BUDGET AGENDA ITEM FROM: Joseph A. Baird OMB Director DESCRIPTION AND CONDITIONS The Board of County Commissioners has requested staff to review the method of calculating interest rates charged by the County to the public for financing utility assessments, utility impact fees and petition paving assessments Indian River County currently carries the cost of financing the assessment's projects from the engineering/design stages, through complete construction until the final assessment roll is done. These projects usually take more than one (1) year, sometimes two to three years from beginning to end. After the final assessment is done, Indian River County gives the public an opportunity to pay the entire assessment within ninety (90) days without any interest costs. If they do not pay the assessment entirely, then they are charged interest on the assessment balance remaining as of the date of the assessment roll. The County, therefore, finances the project from the beginning stages to the completion of the project interest free. It must be kept in mind that when the county finances assessment projects, impact fees, etc. they are utilizing the county's working capital. This money could be invested earning interest or used for another purpose. Currently the County charges a fixed interest rate for those wanting to finance utility assessments, paving assessments and utility impact fees of 2 percent above prune rate. The fixed rate is set in January of each year. 'The recent increase in prime rate from 6% to 8 1/20/a from the prior year has prompted several questions regarding the County's policies regarding interest charges. 1. Should we tie the interest rate to prime interest? Prime rate is the lending rate banks charge their best customers (which are rare and few). It is the benchmark most institutions use when setting lending rates for a customer since it fairly reflects the prevailing market condition at the time. If prevailing market conditions had been different and interest rates went down, we would have to reduce the interest rate borrowers paid, which we did in the prior year. 2. It has been asked if tax-exempt paper would be a better benchmark? Tax-exempt paper rates fluctuate significantly more than the prime rate and is more complicated for the following reasons: a). Supply and demand of tax-exempt paper play a significant role in the interest rate. (Interest rates change constantly day to day.) - b). You must assume a bond rating (i.e. will it be considered AAA, Aaa, Aa, A, Baa, BBB, or non -rated). ,ROOK 94FACc.343 FEBRUARY 14, 1995 13