Regional News

Two-Week Reprieve

SAN FRANCISCO - With no end in sight to the legislative quagmire that has left California without a state budget six weeks into the fiscal year, a slightly better-than-expected July has given decision makers a two-week reprieve before they have to decide on how to borrow money to shore up the state's cash position.

"For the second consecutive month, total receipts exceeded the most recent estimates, while state spending was less than anticipated," State Controller John Chiang said in a statement when his office released its monthly cash balance report Friday.

That extra cushion means that the state will not be forced this week, as had been expected, to lock in the decision on how it will conduct its upcoming cash-flow borrowing of $10 billion or more.

California will need a cash-flow borrowing one way or the other. The question is: what form will it take?

Finance officials would prefer to issue revenue anticipation notes, as the treasurer's office does in most years.

But to do so, an enacted budget must be in place demonstrating that the state government will have enough resources available to redeem the notes before the end of the fiscal year June 30.

If the state can't issue Rans, the state controller's office would issue revenue anticipation warrants, or Raws. The warrants allow the state to borrow cash on a short-term basis without a budget in place or between fiscal years, but they come at a much higher cost than Rans, as the state would need to buy expensive credit enhancement facilities - or pay much higher interest - in order to make the notes marketable.

California last issued Raws - an $11 billion transaction - during the budget crisis in 2003. For that issue, the state paid Wall Street firms more than $84.5 million for credit enhancement, plus a further $33.6 million in fees following a subsequent ratings downgrade.

With the latest controller's cash report, Chiang said California has more than $10 billion in unused internal borrowable resources, more than twice the estimate in the governor's May budget proposal. That means the state will have enough of a cash cushion into the month of October before an external borrowing would be necessary to meet state cash needs.

It still takes a great deal of time to put together either a Raw or Ran transaction, so the most likely deadline to make a decision on which kind of borrowing to plan for is now the week of Aug. 25, as opposed to this week as had been expected earlier, said H.D. Palmer, finance spokesman for Gov. Arnold Schwarzenegger, yesterday, adding that the Department of Finance concurred with the controller's office's projections.

"That's a good thing," he said. "If we get a good budget passed in the next couple weeks, we can do a Ran instead of a Raw."

Whether that can happen remains an open question, as Democratic and Republican lawmakers appear to be at complete loggerheads over the state's budget.

They need to figure out how to close a $15 billion general fund deficit. They also have to muster a two-thirds vote in each house to pass a budget, which gives minority Republicans effective veto power.

Democrats have floated a plan to raise $9.7 billion in new revenue, primarily by increasing marginal income tax rates. Schwarzenegger, a Republican, has reportedly proposed a temporary sales tax hike.

But Republican lawmakers say they remain adamantly opposed to any tax hikes.

And another looming deadline threatens to remove an important negotiating tool. This week is the deadline for placing constitutional amendments on the November ballot. Constitutional budget reform has been one of the major goals of both Republican lawmakers and Schwarzenegger. If it's off the table, they would appear to have even less motive to compromise.

The respite in the state's cash position is no reason to take it easy, Palmer said.

"We can't put it in neutral and coast for two weeks," he said. "We very much need to get a good budget adopted sooner rather than later."

Fieldman, Rolapp & Associates is the controller's financial adviser for a potential Raw transaction.

Because it is not yet known if the state will issue Rans or Raws, the cash-flow borrowing is being developed as a joint effort of the controller's office and the treasurer's office, Joe DeAnda, a treasurer's spokesman, said yesterday in an e-mail.

"Accordingly, we have also chosen a financing team that will work on whichever type of borrowing we pursue," DeAnda wrote. The underwriting team for Rans will be led by Banc of America Securities and Goldman, Sachs & Co., DeAnda said. Montague DeRose and Associates LLC is the financial adviser for the Rans.



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