LOS ANGELES -- California finance officials met Tuesday with a consortium of 18 banks to arrange creciit backing for $4 billion of the state's unprecedented $7 billion of borrowings planned next month:
The meeting occurred as the state's political leadership continued to grapple with how to resolve a budget impasse in time for the start of the next fiscal year on Friday. One problem holding up a budget is that lawmakers cannot agree on how to devise a so-called trigger mechanism that would guarantee repayment of the short-term borrowings.
State officials are forging ahead with plans to sell the $7 billion of short-term debt in two financings scheduled one week apart, said Hal Geiogue, the state assistant treasurer, in an interview late Tuesday.
A total of $4 billion of revenue anticipation warrants would be sold via competitive bidding on July 20. The deal would close on July 26.
On July 27, $3 billion of revenue anticipation notes would be sold in a negotiated deal whose senior bookrunning manager is Bank of America.
The Rans would mature at the end of June 1995, and the Raws would mature on April 26, 1996. Under California law, notes must be repaid within the same fiscal year they are issued, but warrants can be repaid in a later fiscal year.
The $3 billion of Rans would be sold without credit enhancement, but California is seeking credit support from domestic and international banks for the entire $4 billion Raws issue, Geiogue said.
In a meeting with state finance officials in Sacramento on Tuesday, representatives of 18 domestic and international banks were asked to decide by July 8 whether they would "execute a warrant purchase agreement similar to a letter of credit," Geiogue said.
A warrant purchase agreement "is a true commitment" that a participating bank would "actually purchase" a portion of the Raws, if necessary, Geiogue said. He characterized this form of support as a stronger protection for investors than if the banks provided only a standby agreement to bid for Raws.
From the state's perspective, such credit support is "like buying insurance," Geiogue said. The cost to the state is $8,000 per every $100 million of bank commitments, he said.
"It's worth the cost of insurance" because credit support would lower the state's interest expenses, Geiogue said. If the state went to market without insurance, he said, "you have the downside of selling $4 billion of uninsured Raws. What is the market going to charge for that?"
With credit support, Geiogue said he expects rating agencies to assign high quality short-term ratings to the Raws borrowing.
California "should be able to get an acceptable structure in place" that would appeal to investors, said Cadmus M. Hicks, a vice president with John Nuveen & Co. Hicks declined to say whether Nuveen would purchase any of the short-term obligations "until the agreement's in place."
Nuveen earlier this month published an eight-page credit overview on California written by Hicks. The report is one of a number of investor comments on California issued in recent days, underscoring the high degree of interest among municipal market participants about the structure of the state's July borrowings.
As recently as mid-June, state officials were talking about issuing $5 billion of Raws and $2 billion of Rans. But budget officials changed their minds last week, deciding instead to decrease the size of the Raws and increase the size of the Ran issue, Geiogue said.
With the Raws, the state wanted "to keep the amount as small as possible," Geiogue said.
Both houses of the state legislature were scheduled to meet yesterday to try to break a budget deadlock for fiscal 1995. The constitution requires the passing of a one-year budget by June 15 annually, although the deadline often is missed.
This year was no exception, but a severe cash shortage means the state will have to immediately gear up to issue IOUs, called registered warrants, to pay its bills if budget negotiations continue into next week, a spokesman for state Controller Gray Davis said Tuesday.
Davis' warning had a familiar ring to it -- in the summer of 1992, the legislature, unable to pass a fiscal 1993 spending plan for 63 days, forced the controller to issue $3.6 billion of IOUs.
The logjam over the spending plan is partly caused by the inability of legislators to decide the best method to guarantee repayment of next month's borrowings. Lawmakers are discussing different "trigger" proposals that would allow automatic budget reductions if incoming revenues fall short.
"I think everybody understands we need to get this budget done on time to send this strong signal to the financial community," said Harold D. Palmer, assistant director of the department of finance. "We need to do that to avoid the specter of IOUs," which, if issued, might have ramifications for the state's credit rating.
Moody's Investors Service and Fitch Investors Service rate California general obligation bonds doubleA; Standard & Poor's Corp. rates them A-plus. Standard & Poor's in February revised the state's longterm outlook to negative from stable. In March Fitch changed California's trend to declining from uncertain, and Moody's this month said it is reassessing its California GO rating.
The July 20 and July 27 sale dates for the short-term borrowing are contingent upon California's political leadership completing the state budget by Friday. If budget completion "drifts significantly into next week, then we will have to reevaluate these time lines," Geiogue said.
If the borrowings do not take place as now scheduled, the state would be about $2.9 billion short of meeting its financial obligations in July, Davis said. Next month the state must pay back $2 billion in Raws that were issued in February, and it has payment obligations to public schools and the state payroll.
With the need to resolve the budget quickly, legislators are trying to pass a "trailer bill" to the main budget act to automatically reduce the size of the budget if revenues fall short.
The trigger mechanism allows state Attorney General Dan Lungren "to reach an unqualified opinion" of the legal validity of the short-term borrowings, Geiogue said. This legal opinion is required by investors, and "that is what is important about the trigger."
Gov. Pete Wilson on Monday announced his support for one version of a trigger mechanism that Republicans were expected to support, but a vote was not taken on his proposal. Instead, Senate president pro tem Bill Lockyer, D-Hayward, proposed a trigger that would permanently extend a temporary increase in the state's top income tax rate. Lockyer's proposal received 19 votes to 18 against, but 27 votes were needed for the required two-thirds majority.
The Assembly's Democratic leadership, meantime, is reportedly preparing their own version of a trigger mechanism.
Debate over the election-year budget has taken on strong partisan tones m part because 100 of the 120 seats in the legislature are on the Nov. 8 electiOn ballot.
Democratic state Treasurer Kathleen Brown is running against Wilson, the incumbent Republican governor, and Davis, a Democrat, is running for lieutenant governor.
Wilson's proposed budget anticipates the receipt of funds from the federal government for the cost of illegal immigrant services. He expects $763 million in fiscal 1995, and $2.8 billion in fiscal 1996.
Both Brown and Davis have said the federal dollars are highly unlikely. In comments to reporters on Monday, Brown said the "reliance on federal dollars -- whether it be this year or next -- remains a major, major problem for California. It is a problem with respect to our long-term ratings."
In a press release, Davis criticized Wilson for "relying on fantasy money from the federal government to pay off a loan." He added it "certainly won't satisfy Wall Street investors."
In May, Brown proposed legislation to eliminate the state's chronic deficit by selling up to $4 billion of deficit-revenue bonds that would be repaid over five years.