What are municipal bonds and BOTs? How is the Owen County jail project using them?

To fund large capital projects, it is common for governments to use municipal bonds. They function like a mortgage or bank loan and — paired with a build-operate-transfer (BOT) model — are fated to fund almost all of Owen County's proposed jail project.

The county chose the BOT model for the project to protect the county and taxpayers, Owen County Sheriff Ryan White said.

"It is a protection for the county and the taxpayer," White said. "It is a system that provides protection so that we're not getting charged beyond what we have and what we can afford."

With this model, which the county is using for the first time, it enters a contract with the jail builder that sets a maximum amount of money for the project. So, if the builder exceeds that amount, the excess costs are their responsibility, not the county and its taxpayers.

The BOT model also does not require a bidding process, White said. The selected contractor can find a company it is familiar with and has a relationship with. The county also may use local subcontractors they know and have used before.

The BOT model became an option for governmental bodies in 2022, when Senate Enrolled Act 166 went into effect and allowed those entities to finance projects with public-private agreements.

However, the jail project is different from other ways governments use the BOT model, like for a subway system or roadway, which can collect fares and tolls. Typically, the company involved in building the project would operate it for a contracted amount of time until they reimburse themselves for the costs. After, the company would transfer ownership to the government.

"With the jail, that's not possible," White said. "There's no revenue that they're going to receive from the jail. There's just not. And any revenue that is generated in the jail is definitely not enough to sustain what it would cost to build."

So, in this case, the county is still using a BOT model, but is funding the construction through bonds. These are initially backed by using the Owen County Courthouse as collateral. Once the construction is complete, the jail itself becomes the collateral for the bonds.

Jeff Peters, the county's municipal adviser for the project, said a county jail doesn't act as collateral in the same way that a house might for a mortgage.

"Nobody would have a use for it other than the county," he said. "So the security and the repayment comes from the taxpayers that utilize the jail or have the jail utilized on their behalf."

Peters' job is to serve as the fiduciary for the county and look out for its best interests to ensure it gets a fair deal that meets all of its needs and requirements in the open market transaction.

In this case, the companies involved in building the jail are Build BW and Garmong Construction Services. Garmong specializes in BOTs, White said, and will act as a liaison between Build BW and the county commissioners. The county also entered into an agreement with Elevatus Architecture firm.

To fund the project, the county plans to use county resident income taxes, which are set by the county council. Governments can also use property tax repayments, revenue stream for utilities or tax increment financing (TIF) districts to repay bonds.

The issued bonds will be bought by bank institutions and private individuals that buy them retail, for example, Peters said.

The jail project's underwriter is global wealth management and investment banking company Stifel, which dices the required jail funding money into $5,000 increments. Then, those increments are sold to a "broad market of people" who buy and resell them "to the people who most want that certain amount of debt and interest income."

In return, the county gets the lowest interest rate it can.

"As different buyers bid against each other to buy these securities, they obviously accept lower and lower yields," Peters said. "So, therefore, the interest costs to Owen County and its taxpayers are going to be less."

One benefit of municipal bonds for Owen County taxpayers is that they are tax exempt, Peters said. Therefore, the people who buy the bonds get a smaller, untaxable yield or interest rate. The county and its residents, in return, are anticipated to pay about 4.5 percent, a much smaller interest rate for the bonds than they would at a commercial bank loan or mortgage, Peters said.

Municipal bonds can reach maturity, or reach the point where the issuer repays the initial amount borrowed, in as little as one year. The county jail project will mature in about 20 years, Peters said. Each year, the county will pay back part of the bond.

However, White said, the county could repay the bond several years earlier, depending on the county's growth. A higher population results in more people contributing to the money garnered from income taxes.

The proposed jail is expected to cost between $37.4 and $38.5 million total, depending on the chosen jail design. About $4 million is already reserved from the county levying income taxes from residents over roughly the past six years. Municipal bonds will fund the remainder.

Although the securities will be repaid by income taxes, the back stop, or safety net, is property taxes. Owen County has "no anticipation of using property tax to pay it back, but it makes for the best security in the market," Peters said.

As a result, bond holders are more comfortable with buying the debts and therefore accept smaller yields and charge less interest, Peters said.

For funding a large capital project such as the jail, there are a few other options. One of these is a bank loan — a bond funded by a single bank. However, Peters said, banks typically charge higher interest rates and want debt that is 10 years in length or less. The county's plan to use an open market where the bond is split into small pieces, results in lower interest costs for the county and its taxpayers, he said.

Another option would be for the county to continue saving up money until it could pay for the jail in cash, like it has with the $4 million. The county is 15 to 20 years away from that, Peters said, which is not a feasible length of time for the shape the jail is in. Right now, the jail is not in compliance, White said.

"None of us want to build a jail," White said. "That's not what we want to do. There's lots of things that I would rather do, law enforcement related, or that helps the community in other ways. But if we don't, and we end up being sued, then it's gonna cost every taxpayer a whole lot more in property tax, because they would have to raise the taxes to pay for the lawsuit."

Additionally, the cost of building a new jail will continue to grow by about $2.5 million each year, White said.

"Waiting is not in our favor," he said. "The only way it's gonna be cheaper is if you do it sooner than later."

The Herald-Times reported former Owen County sheriff Sam Hobbs said a new jail would have cost $12 million in 2015 and according to the Spencer Evening World, in 2021, a new jail was expected to cost $20 million. Due to inflation and rising costs, the cost of building a new jail has grown by $15 million in five years to reach the $37.4 and $38.5 million total expected in 2026.

When jail construction begins, White said he will be consistently involved with the contractor and subcontractors, giving input on security decisions.

Some logistics of funding are uncertain, Peters said. The county council can't vote on income tax rates and allocations again until July 1, 2028, and must do so before Oct. 1 that year. Along with that, the state legislature meets again in 2027 for a long legislative session, and again, in 2028 for a short session, before the council can vote. So, the state legislature may change the rules and the allocations before that time, Peters said.

The council's goal is to not have to raise the income tax rate, but the future is up in the air.