L.A. County Sells Taxable Bond Issue : $50-Million Offering First Ever by State or Local Government

Raising money to refinance a year-old bond issue, Los Angeles County on Tuesday tread where municipalities never have gone before--the taxable bond market, where the county sold $50 million in bonds to insurance companies and other institutional investors at interest rates ranging from 8.19% to 9.41%.

State and local governments customarily raise money in the tax-exempt bond market, where they can float relatively low-cost bonds to buyers eager to acquire income exempt from federal income taxes--and, in California, from state income taxes. However, in this case, L.A. County officials and their Wall Street advisers say, the county may have saved hundreds of thousands of dollars by selling taxable bonds.

They said that the refinancing takes advantage of current lower interest rates and that, by turning to taxable bonds, the county is not bound by limits on how much it can earn by investing the money raised.

Quasi-government tax-exempt agencies, such as housing finance corporations and highway authorities, have been floating taxable bonds regularly, municipal finance professionals say. But L.A. County is the first state or local government to do so.

Issue Sold Out

“This was a unique transaction,” said Jonathan Plutzik, a vice president at First Boston Corp., the underwriter of the bond issue. “This was the first time many of our taxable bond customers have even seen a tax-exempt bond issuer.”

The $50-million issue was sold out, he said.

Plutzik argued that the issue’s significance lies partially in its testing the waters of the taxable bond market, in light of tax reform proposals in Washington that threaten a sharp reduction in localities’ access to the tax-exempt market.

Tuesday’s L.A. County issue was part of a $291-million refinancing package designed to reduce its interest costs on a 20-year, $262-million bond issue floated in April, 1984. That bond issue, in turn, was floated to pay off leases on 24 county facilities, including the Hall of Administration, the Hall of Records, the Central Jail and several golf courses that were originally built with $220 million borrowed from the county’s Public Employees Retirement Assn.

The association was trying to dispose of the low-yielding leaseholds that it held on those buildings, explained Sharon Yonashiro, assistant chief of the finance division of the county chief administration office.

The latest refinancing will pare about $900,000 annually from the $27-million annual cost of last year’s issue, she said.

Yonashiro said that, by placing $50 million of the $291-million issue in the taxable market--the remaining $241 million was sold in the tax-exempt market about six weeks ago--the county avoids federal restrictions on how it can reinvest the proceeds, which it does not actually need for the original issue’s refinancing for another nine years.

Federal rules forbid tax-exempt issuers from reinvesting such money at a higher interest rate than that of the original bond issue.

At the same time, the county may also be stealing a march on the authors of tax reform bills in Washington. Among the U.S. Treasury Department’s reform proposals is one that would forbid advance refundings of tax-exempt bond issues--that is, refinancings done in advance of the dates that the original bonds come due.

“So it behooved us to do this now,” Yonashiro said. Recent sharp declines in interest rates have also made the bond market particularly receptive to refinancings, she noted.