Regional News

California Issues POS For $4B Note Issue

SAN FRANCISCO - California has issued a preliminary official statement for a $4 billion revenue anticipation note issue that it plans to price next week, amid continuing concerns over the market's ability to absorb such a deal during the ongoing credit crunch.

"We're proceeding full speed ahead with that plan," said Tom Dresslar, spokesman for state Treasurer Bill Lockyer. "That said, obviously the markets remain extremely uncertain, to put it mildly."

With short-term lending markets close to frozen, Lockyer and other state officials are looking at alternatives that include federal loans, credit enhancement, and bank loans, Dresslar said.

"We're continuing to pursue other avenues to be sure we have the cash we need at the end of the month to continue services," Dresslar said.

California is planning to issue $7 billion in Rans this year, though Lockyer said last week the initial issuance might be reduced in size to $3 billion or $4 billion.

Unlike other jurisdictions that have wiggle room to wait for a hoped-for revival of the markets, California needs cash in a hurry.

Without external borrowing, California will deplete its cash reserves on Oct. 29, according to a report released yesterday by State Controller John Chiang.

Because of concerns over the ability of the markets to accept a note deal of the size California plans to offer, Gov. Arnold Schwarzenegger has asked Treasury Secretary Henry Paulson for federal assistance. Those discussions are ongoing, according to the POS.

Dresslar said legal concerns over the federal government's ability backstop tax-exempt securities, raised in a recent New York Times article, shouldn't be an issue.

"Our reading of that code is that it just applies to the federal government backing or guaranteeing tax-exempt bonds," Dresslar said. "That's not what were trying to do. We're asking them to give us a loan, or buy some RANs, or buy some commercial paper. We don't think that presents a legal obstacle."

State Sen. Dean Florez, D-Shafter, in a widely publicized letter to Lockyer last week, suggested using the state's two massive public employee pension funds to buy or support the Ran issue.

As of yesterday, neither the California State Teachers' Retirement System nor the California Public Employees' Retirement System had received such a proposal, according to spokeswomen for the two funds.

"The first step is to get the investment opportunity and then to conduct due diligence, and neither of those has happened yet," said CalSTRS spokeswoman Sherry Reser.

"It's really too early to know if it's a realistic possibility," said CalPERS spokeswoman Patricia Macht.

Chiang, in the monthly cash report, underscored the state's fiscal woes by reporting that general fund revenue for the first quarter of fiscal 2009 was $1.1 billion below budget projections.

"Revenues are deteriorating faster than expected, and September's cash flows send strong signals that the recently-enacted budget is more out of balance than we feared," Chiang said in a statement.

Schwarzenegger was to meet with legislative leaders late yesterday, and administration officials have said they may convene a special budget session to reopen a budget that was signed less than three weeks ago, after a 12-week standoff.

According to the POS, the state is preparing to sell a $4 billion Series A, a number that is subject to change. That would be followed by later series, none of which could have a higher priority for repayment than Series A.

Banc of America Securities LLC and Goldman, Sachs & Co. are slated to lead a syndicate that includes 30 other underwriting firms.

Montague DeRose and Associates, LLC is the financial adviser. Orrick, Herrington & Sutcliffe LLP is note counsel and disclosure counsel.



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