KING WILLIAM RESERVOIR PROJECT

FINANCING OF REAL PROPERTY ACQUISITION

This press release is being issued to address questions that have arisen regarding the proposed financing of the real property to be acquired by King William County for the proposed King William Reservoir Project.

The King William Reservoir Project Development Agreement (PDA), which was approved and executed by the county and the City of Newport News in 1990 and subsequently amended in 1992, 1995 and 1997, specifies the legal obligations of both parties regarding, among other things, property acquisition, property ownership and compensation to the county for the reservoir facility.

Under the PDA the “county shall acquire, through purchase or condemnation, the property identified by city ….. necessary for the reservoir” and associated facilities. Furthermore, the “county agrees to finance the cost of acquiring this property by any reasonable means, including the issuance of revenue bonds or borrowing monies through the Virginia Resources Authority” (VRA). The VRA was created by the General Assembly in 1984 and has financed more than 750 local government and other public projects including water, wastewater, solid waste and public safety. The VRA provides financing at interest rates that most localities can not achieve on their own through the issuance of bonds, pooled for multiple public projects, which are backed by the moral obligation of the Commonwealth of Virginia.

According to Morgan Keegan & Company, Inc.’s public finance office in Richmond, the VRA offers a “more attractive, reasonable form of financing” for localities, such as King William County, that “does not have a bond rating” and, therefore, would find general obligation bond financing to have higher interest rates and, thus, to be more expensive. Most smaller localities do not obtain a bond rating due to the expense to do so; rather they more likely participate in pooled bond issues such as VRA. (Morgan Keegan is a large, full-service regional investment firm, founded in 1969, which offers investment banking, securities brokerage, trust and asset management to individual, corporate, institutional and governmental clients.)

The issuance of general obligation bonds by counties requires voter approval and, if approved, a pledge of the full faith and credit of the county. The estimated additional cost to King William County to utilize this form of financing rather than VRA is about $161,000. This cost is derived from Morgan Keegan’s estimate that a general obligation bond issue would cost $86,000 more in interest over the 30-year term of the issue than VRA revenue bonds and McGuireWoods’ bond counsel’s estimate that the local cost of a voter referendum on the use of general obligation bonds for a county capital project would be $75,000. (McGuireWoods is a large, national law firm, whose largest office is in Richmond, that has provided legal counseling and litigation services to both private and public clients, dating back to 1834. The law firm has served as King William County’s bond counsel for many years, including the county’s new courts and public safety facility. Its only role in connection with the revenue bonds is bond counsel to VRA. McGuireWoods does not serve as bond counsel to the City of Newport News.)

Another form of long-term financing that is available for the property acquisition portion of the proposed reservoir project is the issuance of lease revenue bonds. Like VRA financing, lease revenue bonds do not require voter approval. However, Morgan Keegan estimates that a lease revenue bond issue would cost $170,000 more in interest than VRA financing over a 30-year debt service payment schedule.

As noted above, King William County is contractually obligated to acquire and to finance the acquisition of property identified for the reservoir project under the Project Development Agreement of 1990. Therefore, rejection of a voter referendum of a general obligation bond issue would not relieve the county of its contractual requirement to obtain financing for the property acquisition portion of the reservoir project, albeit through another source. It is due to this contractual obligation and the attractiveness of VRA financing versus general obligation bonds and lease revenue bonds that the county is proposing to finance the property acquisition for this project through the VRA.

Unlike most other forms of long-term indebtedness, no King William County property taxes or utility fees, such as public water system utility charges, will be utilized to pay the debt service on the proposed VRA financing. Rather, the debt service on the bonds that the county will sell to the VRA will be paid in full with lease payments paid to the county by the City of Newport News for properties acquired by the county under the Project Development Agreement. The city is contractually obligated under the PDA to pay lease payments to the county for all properties acquired by the county for the reservoir project, regardless of the status of the project, for the duration of the proposed 30-year indebtedness. These lease payments shall include, at minimum, the semi-annual service on the bond issue’s principal and interest as well as the cost of the bond issue’s issuance. Effectively, the city is contractually bearing the risk associated with the financing of the property acquired by the county regardless of the method of financing utilized. King William County and the VRA will look only to the lease payments and not county property tax revenues or utility fees as the expected source of payment of the VRA revenue bonds.

Finally, as the valuations of the acquired properties increase over the time, the lease payments paid by the city to the county will increase accordingly. It is estimated that the county will receive between $40 million and $45 million in lease payments that exceed the proposed total VRA debt service during the 30-year repayment period. The county will continue to receive from the city the lease payments for the acquired properties even after the debt service has been retired.

For further information regarding the proposed financing of the real property to be acquired for the proposed King William Reservoir Project, please contact the King William County Administrator’s Office at (804) 769-4927.

Sources: King William Reservoir Project Development Agreement, 1990, as amended
McGuireWoods LLP, bond counsel, Richmond, Virginia
Morgan Keegan & Company, Inc., Public Finance Office, Richmond, Virginia
Virginia Resources Authority, Financial Services, Richmond, Virginia

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