DALLAS -- Texas officials on Friday blocked a proposed $400 million cash-flow borrowing, opting for interfund transfers that state Treasurer Kay Bailey Hutchison says will cost taxpayers $6 million more than using tax-exempt commercial paper.
At a brief meeting of the state's Cash Management Note Committee, the panel deadlocked 2 to 2 over Hutchison's plan to issue up to $400 million in commercial paper next month for cash flow needs in the second half of the year.
Because a tie vote kills the measure, it was apparently the first time the committee had ever rejected a borrowing proposal.
Hutchison and Gov. Ann Richards voted for the borrowing, but Lieut. Gov. Bob Bullock and state Comptroller John Sharp rejected the idea, saying they preferred interfund borrowing. The vote pitted the current and former treasurer against the current and former comptroller.
Hutchison said she believes the officials confused the short-term program with long-term municipal debt sales the state is undertaking to build prisons and other projects.
"I'm very concerned that we'd miss an opportunity to save the taxpayers $6 million," she said.
She noted that commercial paper would cost the state 2.6%, while interfund borrowing will be nearly twice that. Under state law, interfund loans must be repaid at the rate the money would earn through investments. Texas is currently earning an annualized average of 5.02% on its cash.
Tom Plaut, the comptroller's chief revenue estimator, said the proposed borrowing was rejected because officials did not believe it met a statutory requirement of being necessary.
"We don't need the extra $400 million," Plaut said. "The $1.5 billion we have outstanding may be more than enough."
As for the projected $6 million savings, Plaut agreed the commercial paper was more economical, but added, "That's peanuts in a budget of our size. If we borrow another $400 million, the average guy out there is going to think things are getting worse, and they aren't."
The decision to block the commercial paper sale does not mean the state is in danger of a cash-flow crisis. Hutchison said that with $1 billion in available funds to draw on, the state will have no difficulty paying its bills on time.
The $400 million was to have been the second installment of a cash management program begun last August when the committee approved a $1.5 billion tax and revenue anticipation note sale -- the largest ever for Texas.
At that time, treasury officials estimated the state would have a record $2.4 billion cash flow deficit in fiscal 1993, which ends Aug. 30. That figure was recently revised downward to $2.1 billion.
Hutchison said the hole in the flow of revenues to the state was caused by a one-time shift in collections of the state franchise tax. The change shifted the most severe cash shortages from January to May. The cash-flow deficit is not related to the state budget, which is projected to end the biennium with a slight surplus.
However, budget writers are already projecting a general fund gap of up to $7 billion in fiscal years 1994 and 1995 between spending and revenues. Officials, led by Sharp, have advocated extensive cost-saving measures by all state agencies.
A Wall Street analyst said the decision will not affect state ratings.
"It doesn't worry me," said Claire G. Cohen, executive vice president at Fitch Investors Service, which rates the state AA-plus. "It's probably just a little more costly this way, but I don't think for $6 million it's a credit concern."
George Leung, vice president and managing director for state ratings at Moody's Investors Service, said that 15 states and Puerto Rico borrow externally, while most do not use the tax-exempt markets.
"The management of cash during the year is something most states continue to wrestle with," he said.
Paul Williams, chief of staff to Richards, said the vote was decided on long-standing philosophical differences between state treasurers and comptrollers. Treasurers have generally preferred tax-exempt borrowing while comptrollers have opted for interfund borrowing.
He said that Bullock opposed the use of external borrowing in 1986 when the state, facing its most severe financial crisis, turned to the short-term tax-exempt markets for the first time.
"I think it boils down to a philosophical difference over how much of your own sources you should use and how much external resource you should use," said Williams, a deputy treasurer when Richards held the treasurer's office. "When this came up, it was deja vu."
Others agreed. "Mr. Bullock feels we should borrow from our own resources," said Wardaleen Belvin, special assistant to the lieuteneant governor. "This has been his position all along."