As counties prepare budgets for the next fiscal year, attention turns to cash flow needs. The state is considering the same issue and finds itself in unprecedented times. Counties will recall that just three months ago, the State Controller found it necessary to withhold all non-priority payments due to inadequate cash on hand. While the passage of a budget package addressed the short term issue, the state still has a huge cash shortfall anticipated for July. Recall, too, that the budget as adopted anticipates two months of deferrals of social services payments in July and August to assist the state with its cash flow problems.
The state and counties are preparing to issue Tax and Revenue Anticipation Notes (TRANs). The state is considering an issue in the neighborhood of $15 billion – potentially the largest in state history.
Many California counties are joining with cities and special districts through the joint CSAC/League of California Cities TRANs pool. This program, managed by California Communities, has issued an annual pooled TRANs for the past 17 years. Last year, 29 local government agencies participated in the program and issued $854 million in notes.
With many cities and counties having to spend down reserves to meet budget obligations, the TRANs program has grown this year. So far, 36 agencies have expressed an interest in issuing an estimated $955 million in TRANs. CSAC encourages all counties to carefully review this program.
One of the issues rising out of the current financial crisis is the lack of credit enhancement for municipal issuers. Because many short-term bonds are issued through a pooled approach, the pool needs credit enhancement to smooth out irregularities in ratings among participants. Historically, bond insurance has been purchased for the enhancement. In today’s market, though, bond insurance is not an option. Program managers have secured a letter of credit to provide enhancement, but the credit requirements are stiff.
CSAC and the League have been working with members of the California congressional delegation, particularly those on the House Financial Services Committee, to seek a federal guarantee of the letter of credit for short-term notes. We’ve been joined in our efforts by Governor Schwarzenegger, State Treasurer Bill Lockyer and State Controller John Chiang. Such a guarantee would expand application of the letter of credit and ensure that all entities desiring to do so could participate in the pool. To be clear, this is not a bailout. A guarantee would not involve the expenditure of federal funds. There has never been a default on a California bond in the history of the state. A guarantee, though, would enable access to the bond market in a manner similar to what existed before this financial crisis and would ensure continued stimulus of the public sector in California.
The TRANs program is rapidly drawing to completion. CSAC staff and others will be meeting with investors next week and with rating agencies the following week to market the program and answer questions. Pricing of the bonds is scheduled to occur during the first week in June, with closing at the end of June so that funds are available on July 1.