The San Francisco Airport Commission refunds $110 million in fixed-rate revenue bonds with new variable-rate bonds to lower its overall interest cost.  •  The San Dieguito Union High School District responds to the turbulent auction-rate market by converting $90 million in ARS bonds to fixed-rate securities.  •  De La Rosa & Co. generates $41 million of retail orders to reduce yields and save the L.A. County Metropolitan Transportation Authority significant interest costs on a $25-million Sales Tax Revenue Bond issue.  •  The L.A. Community Redevelopment Agency obtains a strong investment-grade rating on a $12.5-million Taxable Tax-Allocation Bond issue for the Westlake Recovery Project.  •  Despite a tough market, Beverly Hills successfully refunds $31 million in water revenue bonds and $17 million in wastewater revenue bonds for economic savings.  •  The Gridley Redevelopment Agency clears various hurdles caused by tightening credit in the municipal market to successfully execute its first tax-allocation bond financing.  •  Riverside issues unenhanced Bond Anticipation Notes to mute the effects of the collapse of auction-rate securities and prudently control interest costs.  •  The Sacramento Regional County Sanitation District restructures $50 million in auction rate securities with better performing, direct pay variable-rate bonds backed by letters of credit.  • 
 

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.

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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.

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You can reach DLR Principal Paul Rosenstiel at (415) 495-8863 or prosenstiel@ejdelarosa.com