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County debt shuffle puzzles experts

Luzerne County officials say they are saving money, but a couple of financial specialists see a drawback looming.

Times Leader Staff Writer

WILKES-BARRE- To some financial scholars, the Luzerne County's recent debt reshuffling, despite its complexity, is like taking out a second mortgage to buy groceries.

But county money managers insist the move garnered $3.9 million for the county without a tax hike this year, and could even prevent a tax hike next year, a worrisome possibility for politicians as costs rise to sustain the county court system.

In fact county commissioners think the refinancing worked so well they want to apply the same tactic next month to more of the county's $120 million in long-term debt, contending they can get another $500,000 boost.

Though the refinancing means more money in the coffers now, it also means future commissioners will have to pay out more to cover the debt service.

The fact that the move makes more money available one year before an election is "coincidental," insists Chief Clerk/Administrator Gene Klein.

But two business professors don't see it that way. They are shaking their heads at Klein's plan to use at least some of the $3.9 million, borrowed ostensibly for the Wyoming Valley levee raising project, to pay court expenses next year.

"That's the kind of thing that got New York City in trouble" in the 1970s, said Ted Engel, an associate professor of finance at Wilkes University. "They used money borrowed for street repairs to pay the police."

Paul Seidenstat, an associate professor of economics at Temple University in Philadelphia, said: "They must have had to raise taxes or cut expenditures.

For political reasons, they didn't want to raise taxes. So they decided to manipulate their debt. ... It's up to the voters to decide if this is sound fiscal policy."

Here's how the county got the $3.9 million.

The County Flood Protection Authority is independent from the county, but the county commissioners are three of the five members on the authority board.

Because the authority cannot impose taxes to pay its debts, that job falls to the county commissioners.

In April the commissioners approved a plan refinancing the authority's debt as well as bonds the commissioners took out to fund other county projects, saying it would "save" $4.5 million.

That isn't quite what happened, though.

In reality, the county saved only $71,510 by refinancing the levee bonds and the authority borrowed $3 million more.

The authority then paid the commissioners a $3 million fee for guaranteeing that the levee bonds would be repaid, according to Klein and Michael A. Setley, the county's hired financial adviser.

And because of the refinancing, the authority didn't have to make an $895,000 debt payment this year. That money was also paid to the commissioners as a fee, making the total payment $3.9 million.

The authority then "stretched out" its debt, according to Klein. As a result, the commissioners will pay about the same amount in debt service annually during the next 13 years. But between the years 2012 and 2023, future commissioners will pay more money than they would have before the authority refinanced.

Klein called this a "prudent" and necessary move.

But Seidenstat said "The future generation will have to worry about it."

There's nothing to worry about, according to Setley, of Concord Public Financial Advisors Inc. of Reading.

He said the county will still be receiving enough revenue from the 25 percent tax increase the commissioners passed in 1996 to pay back the levee bonds and the $3 million in new debt. The new debt, with interest, will total $4.2 million by the time it's repaid in 2011.

In fact, Setley said the levee bonds will be repaid three years sooner than under the old plan.

"Is it wise to do this? All I can say is you're limiting your flexibility," said Joe Mysak, editor of Grant's Municipal Finance, a New York City-based newsletter. "It's not setting off any alarms with me. This is what happens before an election."

Klein said he plans to use the $3.9 million windfall in next year's budget "to cope with the escalating costs of the courts," including pay raises and the addition of a 10th judge.

The commissioners gave five top court officers raises totaling $45,000 last year, anticipating the state would take over the county court system. The takeover didn't happen and Klein said he isn't planning on it for the 1999 budget.

Told of the professors' warnings about using debt to pay reoccurring expenses, Klein said all of the money could be used to build a $4.5 million juvenile detention center. The commissioners will have the final say, though, on how it's spent.

The commissioners are not the only ones who did well under the refinancing. Setley, five lawyers and four companies split nearly $560,000 in fees for handling all of the paperwork.

Among the payments were: First Union Capital Markets, the bond underwriters, $218,000; MBIA Insurance Corp., the bond insurer, $72,000; Kutak Rock, a Washington, D.C., law firm that wrote a tax opinion for the bonds, $70,000; Robert J. Powell, a Hazleton lawyer who served as co-bond counsel, $40,000; Concord Public Financial Advisers Inc., $38,000; Universal Printing, which printed the bond prospectus and certificates, $23,000; Stevens & Lee, underwriter's counsel, $21,000; Wilkes-Barre attorney John Moses, who served as the authority's counsel, $20,000; and Mylotte, David & Fitzpatrick, co-bond counsel, $12,500.

David J. Ralis covers Luzerne County government.

Sunday, Sept. 27, 1998