LOS ANGELES -- California Gov. Pete Wilson's proposal to issue $5 billion of revenue anticipation warrants as part of a deficit-elimination plan might need to be modified because of legal constraints, Kemper Securities Inc. said Friday.
"In our opinion, the proposed scheme may raise more legal issues than it resolves, and does not achieve its objective" of erasing the deficit, Kemper said in a municipal credit update.
The governor on June 13 proposed a spending plan for the fiscal year beginning July 1 that would eliminate the state's $4 billion accumulated budget deficit over a two-year period. The plan would cut $3 billion in fiscal 1995 and $1 billion in fiscal 1996.
Under Wilson's plan, the budget gap would be closed by selling $5 billion of RAWs in July to be repaid in April 1996. Another $2 billion of revenue anticipation notes would also be issued next month. The RANs would mature in June 1995.
A two-house conference committee of the state legislature met last week to debate Wilson's budget and to add their own amendments.
Wilson's "proposal for deficit financing may have to be revised, and if a budget is not passed by early July, [registered warrants, or IOUs] will be used to pay state bills, as was done in the summer of 1992," Kemper said.
Kemper said it does not believe California "can generate $5 billion over the next 21 months to meet current expenditure levels and retire the RAWs with any degree of certainty.
"The legal status of the governor's proposal is uncertain, as are the means to finance it," Kemper said. Among the proposal's shortcomings, Kemper said, "is that there is no dedicated tax to retire the RAWs at maturity."
Additionally, "legal issues may arise that could affect the issuance of the 21-month RAWs," Kemper said. For example, a legal challenge might be provoked if the state tries to balance the budget in fiscal 1995 by counting on revenues it would not receive until fiscal 1996. "This certainly raises the issue of a balanced budget, and we question whether the state would receive an unqualified legal opinion for the financing.
"The state is trying to solve a problem over two fiscal years when it has authority to only act one year at a time," Kemper said.
Kemper vice president David Herships, who co-wrote the report with Kemper vice president Thomas A. Orphanos, said in a phone interview Friday that California money market funds would buy the RAWs if they reach the market.
The problem is that "somebody might go to court" to block the financing as currently planned, Herships said.
Another concern, Herships said, is the $3.2 billion of RAWs that California sold in February. On July 26, $2 billion of the RAWs are maturing. The need to quickly raise cash to pay off the obligations places the state on a "short time track," Herships said.
Kemper also said Friday that it would maintain its ST-2 rating on the $3.2 billion of RAWs. ST-2 is a satisfactory quality rating, one notch below Kemper's strongest-quality short-term debt credit classification. Kemper has maintained its Mid-A rating on the state's general obligations since a downgrade from AA in July 1992.