If neither the FRBs nor the ERBs can be issued, the State will try to redeem the maturing RANs and RAWs in June by issuing new RAWs. Unless the State enacts a budget by mid-June (which is unlikely based on historical experience), the RAWs will be issued before there is a 2004-05 budget. Even though there may not be a budget, the State will have to demonstrate to investors how the RAWs will be repaid in June 2005.
In issuing last year’s RAWs, the State pointed to the Governor’s May Revision of the budget which included the FRBs. This was the basis for repayment. But if the RAWs have to be issued again this year, it will be because the State’s long-term bond solutions (the FRBs and ERBs) are no longer options. The State will face a nearly $30 billion accumulated deficit through the end of fiscal year 2004-05, made up about equally of the deficit accumulated through the end of 2003-04 and the structural deficit of 2004-05. Potential investors in the 2004 RAWs will look to the May Revision to be released in May 2004 to judge if they believe there is a credible budget plan that can ensure repayment of the RAWs in June 2005.
The need for a credible plan is required by two parties. First, the State Controller, by law, must certify prior to the issuance of RAWs that the RAWs can be repaid. Second, the capital markets will require a plan. This year’s RAWs were credit-enhanced (see below) to provide a strong enough rating to ensure that they would qualify for purchase by money market funds. This was a necessity given the sheer size of the RAWs and the need to market them as widely as possible. If some type of credit enhancement is not available in 2004, that could be a significant obstacle to the sale of a new issue of RAWs. Registered Warrants If the State is unable to issu.
Let the fun begin.