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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.
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California
Update
GO Bonds, Capital Spending,
Budget Deficits and Cash
On March 24, the State of California sold $6.5 billion of general obligation
(GO) bonds. This was the State’s first GO sale in more than nine months.
Although the State usually sells GO bonds five to six times a year, budget
problems and the delay in addressing them had kept the State out of the market.
The enactment of the February 20 budget set the stage for the new bond issue,
but the budget and the bond sale do not entirely resolve the circumstances that
have created cash pressures on the State and forced the suspension of spending
on thousands of capital projects.
What is the Pooled Money Investment Board?
When the TV cameras showed up at a meeting of the Pooled Money Investment Board
(PMIB) December 17, this “obscure” (to use the journalists’ favorite word)
State agency was thrust front and center into the budget debate. Because of the
cash pressures created by the lack of a balanced budget, the PMIB stopped
capital spending on 5,300 projects (worth $18 billion) to be financed with
State bonds.
What does the PMIB have to do with bonds? In 1986, when Congress enacted
stringent arbitrage and rebate rules for tax-exempt bonds, the State responded
with a law to simplify the process, as well as provide greater flexibility to
make funding available for projects when needed. The law (AB 55) enables the
PMIB to make loans for capital projects from the Pooled Money Investment
Account (PMIA), which is the huge cash pool the State maintains that includes
General Fund money as well as funds for hundreds of special funds. The loan
program functions like a line of credit, giving agencies the flexibility to
draw down funds as needed for projects. The loans are repaid when the State
issues bonds.
As 2008 drew to a close, the State’s budget imbalance and its inability to
issue bonds put dual pressures on the PMIA. According to a report from PMIB
staff, “AB 55 loans now are competing for the same shrinking PMIA pot of money
that the General Fund is using for State operations. In addition to General
Fund operations, the California Constitution and State statutes require the
State to maintain cash sufficient to meet the day-to-day operating needs of
agencies funded by special funds.” It then concluded, “The combined cash
demands of the General Fund, the special funds and AB 55 loans cannot be met
absent a solution to the budget crisis and restoration of the State’s ability
to access the bond market.”
Accordingly, the PMIB (made up of the Treasurer, Controller and Director of
Finance) froze most AB 55 funding. The affected projects included many for
which local agencies had advanced funding and expected to be reimbursed from AB
55 draws.
Just before the March bond sale, the PMIA had unreimbursed AB 55 loan
expenditures of $6.02 billion, the highest balance ever. Of this, $3.83 billion
was for tax-exempt GO expenditures. The rest was primarily for taxable GO bonds
($1 billion) and lease revenue bonds. The $6.54 billion raised in March will
repay $3.87 billion of tax-exempt AB 55 loan expenditures and provide about
$2.67 billion of additional funds to apply directly to projects. Further, the
Treasurer has announced that the State will sell $634 million of lease revenue
bonds and $3 billion of taxable GO bonds in April. A portion of the taxable GO
bonds are expected to be “Build America Bonds” (BABs). (With BABs, the State
would finance tax-exempt GO projects with taxable bonds and receive a
reimbursement from the federal government of 35% of the interest cost.) These
upcoming sales should permit the repayment of most of the $6 billion of
outstanding PMIA loans and provide about $3.2 billion for projects.
These bonds sales, while important in re-starting projects, will not provide
the necessary funding to reverse entirely the December freeze. This is partly
because the bond proceeds used to reimburse the PMIA do not need to be used for
projects. They can, instead, be reserved for other cash needs of the State. To
date, the PMIB has released only $1.15 billion of the AB 55 loans subject to
the freeze. The Department of Finance posted a list of projects to which these
funds and the $2.67 billion raised in March will be applied (www.dof.ca.gov/funding_released/).
In its report to the PMIB before the Board’s April 6 meeting, staff stated
that, “Given the increase in project funding provided by the GO bond sales, and
the need to preserve PMIA liquidity to help the State cope with projected cash
shortfalls, staff recommends the Board not approve additional AB 55 loan
disbursements at this time.” The Board approved the recommendation. Further, to
avoid the freeze that has proven so disruptive in recent months, PMIB staff
further stated an intention “to develop a project financing plan that reduces
reliance on AB 55 loans from the PMIA and maximizes upfront funding with GO and
lease revenue bond sale proceeds.” Future project spending, including
un-freezing projects halted in December, is likely to be more closely tied to
the timing of the State’s bond issues than in the past.
If the PMIB decision is based largely on the State’s cash situation, what is
the status of the State’s budget and cash?
The Budget and Cash
On February 20, Governor Schwarzenegger signed the State budget for the 2009-10
fiscal year more than four months early. With budgets typically enacted months
late, this early enactment changes the typical schedule of budget-related
events.
Normally, the governor releases the proposed budget in January followed by a
revision to the budget (the “May Revise”) in the second week of May. The May
Revise reflects economic forecasts and revenue projections updated from those
on which the January budget was based. With an enacted budget in place, will
there be a May Revise this year?
The answer is yes, although it will be delayed until after the May 19 special
election. That election includes three ballot propositions that are part of the
enacted budget, but require voter approval to be implemented. The most
important is approval to issue securities backed by revenues of the State
lottery, which is budgeted to provide $5 billion in the 2009-10 budget year.
The other two involve the use of about $835 million of funds previously
earmarked by voters for First 5 and mental health programs.
The May Revise must be released by June 8. It will reflect the results of the
election (making adjustments if any of the propositions fail) and updated
projections of revenues and expenditures since the forecasts incorporated in
the February budget. Those forecasts were made at the end of 2008. Since then
the economy has slowed more than anticipated and the Legislative Analyst
released a report in early March projecting that 2009-10 revenues will be about
$8 billion less than anticipated in the budget. Therefore, although there is an
enacted budget, the May Revise is likely to call for adjustments that could
again lead to legislative delays in addressing the problem.
Irrespective of any required budget adjustments, the State will face a pressing
need for cash as soon after the new fiscal year begins. Based on the February
20 budget, the Department of Finance anticipates the State will end the current
fiscal year on June 30 with $6.9 billion of cash and borrowable resources. (The
State meets some of its General Fund cash needs by borrowing from special funds
held in the PMIA, thus the pressure to preserve PMIA resources by not lending
them for AB 55 loans.) Contrast this with $12.8 billion the State had at the
end of the last fiscal year. Since July and August are months where the State
receives relatively little revenue compared to its expenditures, it will need
to address its cash needs immediately, probably with short-term borrowing.
For those local governments that wait to size and sell their TRANs until the
State releases the May Revise, the late delivery of the May Revise may push
back those sales. At the same time, the State’s need to sell a short-term
borrowing no later than early in the next fiscal year, may compress the time
local issuers can sell without being in the market at the same time as the
State.
In all, the February 20 budget anticipates a need to borrow $13.2 billion for
cash purposes by November. The May Revise may incorporate developments that
would push this number higher since the current projection doesn’t reflect
updated revenue projections (such as the $8 billion of deterioration projected
by the Legislative Analyst) and assumes voters approve all the ballot
propositions. At the same time, of course, the May Revise will propose
solutions to any such developments, so the net cash needs of the State
reflected in the May Revise may be smaller or larger than $13.2 billion.
With such great cash needs, the State will continue to take steps to preserve
cash and increase borrowable resources. The February 20 budget made $2 billion
of funds borrowable that were not available previously to the General Fund.
This was in addition to several steps already taken since early 2008 to delay
certain payments and make certain funds borrowable that had already made
available many billions of dollars of cash for the General Fund. Even so, the
Department of Finance noted after passage of the February 20 budget that “it
may be necessary to continue delaying some payments this year and early into
the next fiscal year.”
What’s Next?
Watch for:
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Special election May 19
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May Revise release June 8
The information contained herein is based on sources that De La Rosa & Co.
believes to be reliable, but may neither be all-inclusive nor guaranteed by
DLR, and it may be incomplete or condensed. DLR, in presenting the facts and
condition of the State’s finances, capital spending and or budget deficits
involved in the budget, is not expressing an opinion but presenting the facts
for informational purposes only. DLR may make a market in or trade for its
proprietary account securities discussed in this update. Also, DLR may have
been a manager or co-manager of a public offering of municipal bonds or other
debt discussed within the last three years for issuer named herein. DLR, its
managing partners, directors and employees individually, or their family
members, may have either long or short positions in the securities mentioned,
and may purchase or sell these securities from time to time in the open market
or otherwise for their own accounts or accounts of others.
DLR is a municipal investment banking company providing a range of products and
services to both the State of California and its municipalities. It is one of
the most active underwriters in the State, completing 620 California issues
from 2000 to 2008 that provided more than $100 billion for public projects. DLR
is headquartered in Los Angeles and has a regional office in San Francisco.
Former Deputy State Treasurer
Rosenstiel Returns to De La Rosa
Paul Rosenstiel has rejoined De La Rosa & Co. in its San Francisco office,
returning to the firm where he previously worked for ten years. His move comes
after two years as Deputy State Treasurer of California, during which time he
helped the State of California cope with the worst financial and budget
challenges it has faced in decades.
“I’m excited to be back at De La Rosa,” said Rosenstiel, 58. “I’m convinced
that regional firms with a focus on public finance, like De La Rosa, are in the
best position to help municipal clients meet the challenges they face today.”
President Edward J. De La Rosa credited Rosenstiel with playing a key role in
developing the firm’s California practice in its early years.
“Paul helped the firm grow into a serious regional player during his ten years
with us, and helped build the foundation for the continued growth we’ve
experienced since he left,” De La Rosa said. “We expect Paul to be a key part
of the team that will build De La Rosa into the premier regional firm in
California.”
Rosenstiel joins the firm as Principal and an equity owner. As the senior
banker in San Francisco, his focus will be on expanding the firm’s business in
northern California and helping to manage the strategic growth of the firm.
After opening the San Francisco office of De La Rosa in 1995, Rosenstiel left
in 2005 to serve as Policy Director in Steve Westly’s gubernatorial campaign.
After Westly finished second in the Democratic primary, Rosenstiel joined Bill
Lockyer’s successful race for State Treasurer. After the 2006 election,
Rosenstiel joined Lockyer’s executive staff as Deputy State Treasurer. In that
role, he oversaw the issuance of bonds by the state and played a key role in
Treasurer Lockyer’s efforts to develop new ways to finance infrastructure,
reform municipal bond ratings, and promote prudent and sustainable budgetary
practices.
In a formal announcement of his departure, the Treasurer’s Office said
Rosenstiel’s “intellect, experience, and commitment to good public policy have
been invaluable to the Treasurer and to the people of California. We are very
grateful to have benefited from his integrity, enthusiasm for public service,
thoughtful advice and endless creative energy.”
De La Rosa is a FINRA and SEC registered investment bank specializing in
California public finance and fixed-income trading. Virtually all $235 billion
of municipal debt financings the firm has completed since it was founded in
1989 has been for cities, counties, redevelopment agencies, utilities, school
districts and other state and local agencies in California.
BEN STERN'S MarketWatch
Fresh Bond Supply Stirs
Investor Interest
California Municipal bonds are
seeing a fair amount of customer inquiry in the market’s front end, although
interest in the long ends of the taxable and tax-exempt markets is weak. Why?
Supply has reappeared in the primary and secondary markets. Large mutual funds
continue to lose cash, forcing them to sell off positions on the bid side.
Meanwhile, a $1.25-billion General Obligation issue for the L.A. Unified School
District and a $1.5-billion Illinois G.O. topped last week’s primary calendar.
Both deals had Build America Bonds and tax-exempts.
Taxable Build America Bonds will be nearly 20% of $4.1 billion in primary
issuance (about $845 million) this week. The remaining $3.25 billion will
include more than $1 billion of healthcare bonds. That amount would usually be
easy to absorb but continuing outflows of cash from funds and heavy dealer
inventories have made placing bonds a monumental task. Government bonds posted
large losses across the curve last week, making it even more difficult.
The Federal Reserve’s move to raise the discount rate 50 basis points to nudge
banks back into the private sector and not depend on government caused a sharp
sell-off of stocks and bonds. The Treasury also announced it will sell $126
billion Treasury Bonds this week, including $44 billion in 2-years, $42 billion
in 5-years, $32 billion in 7-years, and $8 billion in TIPs. These factors are
making the market cheaper and might create a nice buying opportunity. Please
contact us for a full run of Municipal offerings.
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