DALLAS - Texas officials say that temporary Internal Revenue Service regulations could prevent the state from using tax-exempt notes for all of its record $2 billion-plus in cash-flow needs during fiscal 1993.
Treasurer Kay Bailey Hutchison yesterday said the new IRS accounting regulations, which took effect June 17 and could change the way the state calculates its cash-flow needs, redefine when a transfer from the general fund is actually spent.
"The question has been when is an expenditure an expenditure?" said John Bell, the deputy state treasurer in charge of Texas's cash-flow borrowing. "Just because it leaves the general fund, it isn't always considered spent."
Texas is apparently the first major note issuer to be affected by the regulation. While ratings analysts were not familiar with the interpretation of the regulations, they said it could drive up the cost of short-term capital for hard-pressed states.
State officials said the regulations will not change a planned $1.5 billion tax and revenue anticipation note sale the week of Aug. 17. But they warned that there could be an affect on the amount of notes the state can sell early next year, when it expects to need another $500 million to $700 million in cash-flow borrowing.
"I don't know that we can quantify [the impact] yet," Mrs. Hutchison said yesterday. "Before we go out again, we're going to take a very careful look at it."
While Texas still expects to meet its cash-flow needs, officials say the more restrictive rules may force the state to use more costly interfund borrowings in the fiscal year that begins Sept. 1.
Fredric A. Weber, a partner at Fulbright & Jaworski of Houston, the treasury's bond counsel on the note sale, said the one-year regulations affect how discretionary transfers can be calculated into the state's cash-flow needs.
"It's not always treated as spent when it's transferred to another entity," said Mr. Weber, also president of the National Association of Bond Lawyers. "It's only considered spent after that entity spends it."
For Texas, the problem results from monthly transfers to some of the state's pension funds. Because about 25% of the amount transferred is not constitutionally mandated, Mr. Weber said, the payments from the general fund are considered discretionary under the new IRS rules.
"Even though there is a statutory requirement from the Legislature and a common-sense requirement to make the transfer each month, they cannot count it," Mr. Weber said.
The rules will not change the planned August sale, but could force the state to replace as much as $100 million in Trans financings with inter-fund borrowing early next year, he said.
"I think the impact right now is to reduce the margin for the state, not to reduce the actual amount of cash-flow notes sold," he said.
George Leung, vice president and managing director for state ratings at Moody's Investors Service, said the practical result of such a regulation could be markedly higher costs of borrowing for hard-pressed states.
"It affects the economics of cash-flow borrowing," Mr. Leung said. "To borrow externally at tax-exempt rates is a more efficient method of cash-flow borrowing."
State officials say that one-year notes can be priced for under 3%, while other methods of short-term borrowing, such as inter-fund transfers, can cost 300 to 400 basis points higher.
Iowa is the largest issues to sell notes since the new regulations took effect. That state's $400 million Trans sale apparently was not affected, however.
"There was no impact that I saw," said Larry Thornton, deputy Iowa treasurer.
Whether others' cash-flow borrowing ability will be affected by the accounting regulations remains to be seen. Mrs. Hutchison said she will raise the subject with the membership of the National Association of State Treasurers at their September national meeting.
"This is something that could really have a greater impact on the larger states," she said.
Ratings analysts said they were not aware of the new regulations and their possible impact on note borrowings.
"Nobody has mentioned that twist to me." said Claire Cohen, executive managing director for public finance at Fitch Investors Service. "Anybody might be affected who makes a similar pension fund transfer."
