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Lightening the Debt Load at Ontario
Airport
De La Rosa & Co. served as Senior Manager on a 2006 refunding of all
outstanding debt at Ontario Airport by the City of Los Angeles’ Department of
Airports. De La Rosa spearheaded the effort to increase the airport’s
flexibility to define net revenues, its debt-service reserve fund, and swap
language. DLR also helped reaffirm its “A” rating and obtain aggressive bids
from the major bond insurers.
(complete version)
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California Without a Budget
Once again, California has begun a new fiscal year without a budget. Now what
happens? Here’s a brief rundown of what to look for over the next few months as
the budget is debated and eventually resolved.
Where Things Stand Now
Last year, the State issued $8.8 billion of Revenue Anticipation Notes (RANs).
They were fully repaid on June 23 of this year. The State currently has no
short-term debt outstanding. According to projections in the Governor’s May
budget revision, the State was to have ended the 2009-10 fiscal year with $6.2
billion of cash available for general fund uses. This compares with $7.1
billion that the State had at the beginning of the fiscal year. General fund
revenues grew by $1.4 billion in 2009-10 compared to the previous fiscal year.
What Happens Until There’s a Budget
Budget delays are common. The budget has been enacted after July 1 about
two-thirds of the time over the last twenty years. The record was 2008, when
agreement wasn’t reached until Sept. 16.
As the new fiscal year starts, budget players in Sacramento seem far apart
(though that could change quickly). In the meantime, the State must manage
cash. The absence of a budget places pressure on the State’s cash, but also
brings some unexpected benefits.
The State receives relatively little revenue in July and August. September has
historically been a relatively high revenue month, but the State has been
accelerating the payment of estimated taxes such that September is now less
important. This year, the June estimated payment has been increased from 30% to
40% of the total, and the September payment (which brought in 20% last year)
has been eliminated entirely. This generally means that the State must complete
its cash borrowing, in the form of Revenue Anticipation Notes (RANs), by late
summer or early fall. RANs are issued and repaid in the same fiscal year.
Therefore, they aren’t debt to address the budget deficit, but merely to
provide working capital during low revenue months throughout the fiscal year.
But RANs can only be issued once a budget is enacted. So what does the State do
if the budget is delayed?
For starters, it can avoid making some payments, which, in turn, will preserve
cash. Without a budget, the State is not permitted to pay, among others, local
governments, some payments to schools, and vendors who provide services to the
State. (Debt service can still be paid.)
Because of the federal Recovery Act, the State is now required to make more
payments than in the past, which some Sacramento observers suggest has taken
pressure off the need to enact a budget quickly.
State employees must be paid, though there is a debate as to whether the State
merely has to comply with federal labor laws. If so, the State must pay the
federal minimum wage, but cannot pay any more. Governor Schwarzenegger says
that is the law, but Controller John Chiang disagrees. A court ruled on the
side of the Governor in 2008, and an appeals court confirmed that ruling just
as the new fiscal year was underway.
The Governor ordered the Controller on July 1 to begin paying only the minimum
wage, and the two constitutional officers have battling lawsuits in the courts.
If employees are paid only the minimum wage, they would receive their remaining
pay in a lump sum once the budget is enacted. In this way, paying the minimum
wage would preserve cash during a budget stalemate, but wouldn’t address the
budget deficit itself. While the minimum wage doesn’t help the budget, it may
put pressure on the legislature to enact a budget quickly.
According to the Controller, the lack of a budget delays the date by which the
State would have insufficient cash to make all payments in a timely manner by
about two weeks, from early September until late September. (This assumes the
State fully utilizes all payment deferrals that the Legislature authorized
earlier in 2010.) If the State still has no budget by then, there are other
cash management tools the State can utilize.
Revenue Anticipation Warrants (RAWs) are one. They are a cash borrowing that
differs from RANs in two important ways: RAWs can be issued in the absence of a
budget and they can (but need not) be repaid in the fiscal year following the
one in which they are issued. So they could be used like RANs to provide cash
within the fiscal year. Or, if they’re repaid in the following year, they could
reduce the steps needed to solve the budget deficit in the year they’re issued.
Regardless of how they’re used, RAWs can take the pressure off the Legislature
to enact a budget. For this reason, governors have historically been reluctant
to authorize them. The State last issued RAWs in 2003. Governor Schwarzenegger
has not suggested using RAWs this year. Though the Controller issues RAWs, the
Governor must agree to their use.
Another cash management tool is for the State simply to delay making payments.
One way to do that is to issue Registered Warrants, more commonly known as
IOUs. The State issued 450,000 IOUs worth $2.6 billion between July 2, 2009,
and Sept. 4, 2009. But in the absence of a budget, IOUs may not be a powerful
cash tool since they can generally be used only for the types of payments that
are prohibited in the absence of a budget anyway. Their use last year actually
occurred after a budget had been enacted, since the 2009-10 budget was enacted
several months early in February 2009.
It is unlikely that the State will issue long-term bonds, such as GO or lease
revenue bonds, until a budget is enacted. The ever-shifting budget debates make
it difficult to provide complete and timely disclosure to the market about the
State’s budget. Accordingly, once the new fiscal year starts, the State
generally waits until a budget is enacted before issuing bonds. And, since
budget enactment also means RANs can be issued (and, if the budget is late,
must be issued quickly), the RANs usually come first.
What Happens When There is a Budget
One reason the RANs must be issued quickly is that, once a budget is enacted,
payments not made during the budget stalemate (such as to vendors and local
governments) are payable immediately. If the budget is substantially delayed,
the State Treasurer can quickly issue RANs upon budget enactment using a
two-step issuance process. The first step is to immediately place “interim
RANs” with a bank for a few months at most. Essentially, this serves as a bank
loan, for a portion of the RANs borrowing requirement, until the State can
access the market for a public offering of the full amount. Then the Treasurer
will follow with the issuance of RANs to investors, probably about six weeks
after budget enactment.
The May Revision to the budget calls for the issuance of $10 billion of RANs,
up from last year’s $8.8 billion. The final size will be determined by the
specifics of the enacted budget. The size of the RANs could be reduced by over
$4 billion if the State were to take maximum advantage of its ability to delay
payments to schools and local governments pursuant to the powers granted by the
Legislature early this year. However, the State is not supposed to use those
powers to reduce the RANs but, instead, to use the RANs to prevent the payment
delays. The delays are an important element in the State’s ability to make it
to mid- September without RANs or RAWs, but are not supposed to be relied upon
as a primary cash management tool once RANs can be issued.
The structure of the RANs will be determined near issuance. Last year, the
State offered about a third of the RANs with a late May maturity and the
remainder with a late June maturity. The State paid 25 basis points less on the
May maturity compared to the June. Some investors preferred the May maturity
because, in a sense, it was senior to the June notes. If any of the May notes
remained outstanding when the June notes matured, the State would have to repay
the May notes before it could repay any of the June notes. Other investors
preferred the June maturity because of the higher yield. Both maturities
carried the same ratings of MIG 1, SP-1, F2.
This is the path to managing cash in 2010-11. The budget itself will tell us
whether the State has made progress in addressing its persistent structural
budget deficit.
*******
You can reach DLR Principal Paul Rosenstiel at (415) 495-8863 or
prosenstiel@ejdelarosa.com
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