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BOpK. 9 PuA44 c). Tax-exempt paper is significantly impacted by the local government - environment. An example of this is in late December and the beginning of January, tax exempt bonds had a higher than usual interest rate because of the Orange County derivative situation. d). Tax-exempt interest costs include bond issuance costs in addition to the project cost. An estimate would have to be made on how much issuance cost would have to be attributed to the project (i.e. bond counsel, underwriter, issurer, fed fund rate, financial advisor, etc.). 3. Why a fixed not variable rate? We feel a fixed rate is better for the following reasons: a). We can tell individuals what their payment will be up front for the term of the loan and they can include this in their household budget. They have a known amount they can count on. b). Raising interest rates is never an easy decision for the Board of County Commissioners. If we changed to a variable rate every individuals assessment would change on an annual basis. Second, raising interest rates is never popular and you would eventually affect every assessment roll that has been passed for the last 10 years, 5 years or 2 years. 4. Why is the interest rate set at 2 percent above prime? The interest rate was set at 2 percent above prime for the following reasons: a). The County did not want to take business away from banks or compete with banks but still needed to make financing available for those who could not get a conventional loan. Most people who would finance the assessments or utility impact fees would do so through a second mortgage or a home equity loan. Home equity loans and second mortgages are usually approximately 2 percent above prime. b). We also needed a differential for bad debt expense to help to fund the cost of delinquent and non -payers. c). In the past, when we did large bond issues for assessment projects' (i.e. North County assessment project) the bond industry usually required the County to charge those being assessed 2 percent above the bond issue interest rate so there was sufficient money available to make timely debt service payments. (Once again 2 percent was a factor they used for delinquent payers and the expense affiliated with them.) Since _ the - bond industry found 2 percent to be a prudent business rule of thumb, we adopted the same policy. RECOMMENDATION Staff feels that prime rate is the best benchmark. If the Board of County Commissioners feels that 2% above prime is too high then they should consider reducing the rate to 1 percent or 0 percent above prime; however, we feel prime should remain as the benchmark. FEBRUARY 14, 1995 14 M M M