In response to the article in your February 9 issue titled “What to Do With a Pot of Money”, I would like to offer one correction: in the February 8 Commissioner’s Court meeting the amount in the Appraisal District account of the Agency Fund was said to be $285,000 - not $85,000 as reported in the newspaper article.
Second, I would like to address some of the issues presented in the article. As a director of the Blanco County Appraisal District, I learned about the existence of the account in question at our last board meeting on December 14, 2010. During a discussion of the District’s 2009 independent financial audit, the chief appraiser commented that there was enough money in the Appraisal District account of the Agency Fund to pay off the mortgage on the District’s new office building. She suggested that the board consider this, and she also produced a letter dated August 23, 2007 from attorney Judith Hargrove giving a legal opinion that the board has full authority to use the money for any lawful purpose. This opinion was based on the premise that the money was not contributed to the District by the taxing entities (i.e., the school boards, the county and city governments, etc.), so assuming the tax office has kept adequate records for this account, it should be easy to substantiate that premise. Even so, the point may be moot if spending the money requires budgetary approval, which ultimately is under the authority of the taxing entities. During the meeting I commented that it makes sense financially to pay off a five percent note with money that is earning only two percent in a bank account, but I also expressed my concern that the taxing entities might not agree with Hargrove’s legal opinion. The board then resolved to notify the taxing entities of the proposal before taking any action on it, and accordingly the chief appraiser sent them a letter. Unfortunately, the letter said that we were planning to use the money to pay off the note, which created the impression that a decision had already been made. I want to make it very clear that the board has not taken a vote regarding what should be done with this money. Because the topic was not included in the official agenda published in advance as required by the Open Meetings Act, such a vote would have been improper and voidable under state law.
I thought Tex Riley asked the key question in Commissioner’s Court when he inquired whether anyone had determined how much money taxpayers would save by paying off the note. Everyone knows that a dollar today is worth more than a dollar next year, so the exact answer to such a question requires comparing the use of today’s dollars (i.e., the payoff amount of the note) to the present value of the future cost savings over the life of the note. The method for this is called “discounted cash flow analysis” because it uses an interest rate (usually the borrower’s “cost of capital”) to discount a stream of future cash payments back to their present value, thereby providing a true basis for the investment decision. In this case, three pieces of information are needed: the payoff value of the note, the amount and timing of all scheduled note payments, and the cost of capital to be used for the discount rate. The first two pieces are readily available, but the third one is more problematic. One could argue that the cost of capital is the five percent being paid on the note, or one could argue that it is the difference between the five percent note and the two percent interest earned in the bank account. Each of these choices would produce a very different answer to Mr. Riley’s question. In general, the higher the discount rate, the less money would be saved (in today’s dollars) by paying off the note. At a high enough discount rate it would cost more to pay it off than to keep it.
Perhaps there is another way to look at this decision. If the choice of how to use this money is either to let it sit in an account earning two percent or to pay off a mortgage costing five percent, it doesn’t take much math to understand that only a fool borrows money at five percent to invest it at two percent. But suppose that is not the only choice. As custodian of this account, the Appraisal District may debate who has the legal authority to disburse it, but to whom does it actually belong? Suppose it belongs to the taxpayers of Blanco County, would that change the financial argument? Suppose that instead of keeping it in an account earning two percent or paying off a tax office mortgage costing five percent, a taxpayer might use it to pay down his own mortgage costing five percent or more, or pay down a credit card costing thirteen or fourteen percent, or if he has no debt, invest it for a higher return than the Appraisal District can provide. If the taxpayers do own this money, perhaps the appropriate discount rate is their collective cost of capital, not the Appraisal District’s. If that is true, it might cost taxpayers more to pay off the note than to use the money to reduce next year’s taxes.
For interested readers, this matter should be on the agenda for the next Appraisal District board meeting, which is of course open to the public. If normal practice is followed the meeting will be scheduled for March 8 at noon in the tax office conference room.
Vice Chairman – Board of Directors
Blanco County Appraisal District