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Swaps no longer allowed to finance courthouse construction

The Administrative Office of the Courts will not allow the Kentucky Association of Counties to finance state courthouse construction deals as long as the association uses a controversial mode of financing known as swaps, state court officials said.

Carole Henderson, budget director for the AOC, said Thursday that she had concerns about how KACo structures its public financing deals because of its use of swaps.

In such deals, KACo trades a county's lease deal to US Bank to provide the county with what KACo bills as a "fixed rate" for the counties. But that financing is subject to market forces and, in the worst case scenario, could leave counties on the hook to pay hundreds of thousands of dollars more in fees and interest.

"If something changes or if US Bank loses its rating, it will affect the payments," Henderson said.

KACo is involved in financing 11 courthouse construction or renovation projects.

Several lawmakers raised similar concerns last week at a legislative committee meeting that reviewed a deal for the University of Kentucky to buy Good Samaritan Hospital for $35 million. UK officials went through KACo's financing branch — the County Leasing Trust, or CoLT, to pay for the deal. They told lawmakers they thought the deal had a fixed rate, but they now acknowledge that the interest rates could change.

KACo officials said counties and other entities, such as UK, that have been parties to such swap deals have nothing to worry about.

Grant Satterly, director of KACo's financial-services department, acknowledged that terms of swap deals could change if trustee fees or the letter-of-credit costs increase, forcing the county's interest rates up.

"But in 20 years, that has never happened," he said. And KACo would cover the costs if it did, he said.

The state court officials and some counties, however, said that's not what they thought they had signed up for.

"I think we were under the impression it was a fixed-rate deal," Henderson said.

KACo hasn't financed any new courthouses since 2007, when the administrative courts office changed some of its regulations.

County official: no qualms

Trimble County is nearly two-thirds finished paying off a $650,000 bond over 10 years for a renovation of its courthouse that began in 2001.

Judge-Executive Randy Stevens, who inherited the project, said the swap program is just as good as a fixed-rate deal, and he has no qualms about financing a courthouse project through KACo.

Stevens has served on KACo's leasing trust board since 2007 and said that, if anything, the association should change the wording to avoid confusion in the future.

"There's been some discussions to change the name for a 'fixed rate' to a 'guaranteed rate,'" he said. "We can simply say that it's been guaranteed, and if the rate goes up, we'll take it out of (KACo's) administration costs."

Stevens said he was disappointed that court officials have doubts about KACo's financing.

"We'd love for the AOC and the universities to be customers of ours," Stevens said. "We think we can give them just as good a product as anywhere at a better price."

He said he suspected that one of KACo's financing competitors first raised questions to the Administrative Office of the Courts.

"The whole issue of this fixed-rate thing all came up when we started getting a little bit of the market in these justice centers," Stevens said. "What possibly happened is one of our competitors went to AOC to educate them about why they are more expensive than KACo."

Ross Sinclaire, a Cincinnati-based bond-financing firm, has handled nearly 70 percent of the county courthouse deals in Kentucky since 1998.

Murray Sinclaire, chief executive of the firm, did not return a call for comment.

'Synthetic fixed rate'

AOC officials said they started looking into the association's financing deals after an April 3 meeting of the Court Facilities Standards Committee, which reviews courthouse construction. State Sen. Robert Stivers, R-Manchester, who co-chairs the panel, questioned why more projects were not financed through KACo, which seemed to offer much more competitive rates.

Henderson said her research highlighted concerns about swap deals, which have caused problems for municipalities in Tennessee and South Carolina. She called the process a "synthetic fixed rate."

Henderson also attended last week's legislative committee meeting, at which lawmakers reprimanded UK officials for getting into that kind of a financing deal. She said that meeting "confirmed" her concerns.

Satterly, of KACo, said the cities in Tennessee are in bad shape because they engaged in swap deals directly and didn't go through a broker like KACo, which buffers the risk.

AOC officials have talked to both KACo and Stivers. Stivers said he wanted a more in-depth meeting about the financing, particularly to find out whether any of KACo's deals have run into trouble before.

"I'd like to know more about it," he said. "There are possibilities and probabilities. I want more information to develop a position."

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