[CALIFORNIA] STATE CONTROLLER KATHLEEN CONNELL SELLS LARGEST ISSUE OF REVENUE ANTICIPATION WARRANTS

California State Controller's Office ^ | June 18, 2002 | Contact: Stacey Ragland

[snopercod]

RAW Sale Receives 3 to 1 Coverage at Historically Low Interest Rates

SACRAMENTO, June 18, 2002 - State Controller Kathleen Connell today announced that the State awarded $7.5 billion in short-term debt securities to a total of six firms submitting bids at the competitive sale.

"We are pleased with Wall Street's excellent response to this offering," stated Controller Connell. "With the sale of these securities, the State has funded its cash flow needs for the remainder of this fiscal year and the early parts of next."

The short-term obligations, called "RAWs" (Revenue Anticipation Warrants), are rated MIG 1 rating from Moody's Investors Service, SP-1 from Standard & Poor's Rating Service, and F-1+ from Fitch Ratings. The RAWs mature beginning in late October and ending in January 2003. A total of 12 firms submitted bids in the amount of $22.4 billion for $7.5 billion worth of securities, and of those, six were successful. Investment firms bid a total of $5.2 billion for Series A with a net interest cost of 1.69%-1.78%; $8.475 billion for Series B with a net interest cost of 1.77%-1.86%; and $8.725 billion for Series C with a net interest cost of 1.92%-1.96%.

"By selling the securities at a competitive sale, the State was able to ensure that it borrowed this money at the best possible rates," stated Controller Connell. "I am gratified that California received the warm welcome that it got."

Six Wall Street firms, including Morgan Stanley, J.P. Morgan, Lehman Brothers, Salomon Smith Barney, Goldman, Sachs, and Banc of America, were among the successful bidders. The RAWs were offered to the public through various securities firms.

The State will receive proceeds from the sale on June 24, 2002.

[snopercod]

I can't believe we FReepers missed this! Was there nothing in the press at all?

[Miss Marple]

Look here! The usual suspects!

[snopercod]

From the SacBee, Dec 18, 2001:This governor confronts state cash-flow squeeze and a RAW deal

The last time RAWs were issued was eight years ago, when a similar squeeze led to $4 billion in RAWs that were repaid over two years.

The controller then was Davis and, with his eyes already fixed on running for lieutenant governor and then governor, Davis made the most of his rare opportunity to participate directly in budget politics. He castigated then-Gov. Pete Wilson, who was seeking re-election at the time, for relying on phantom revenues and insisted on special spending-reduction "triggers" to assure repayment of the RAWs.

"We've had to jump through hoops to make the governor's budget work," Davis said as he sold the RAWs in July 1994. "He seems to think he can balance a budget on wishful thinking rather than reality."

Why is the press silent on this? Where is Simon?

[snopercod]

The LA Slimes is running an article which says that the $11.1 Gray-Bond issue is about to happen, too.

[Miss Marple]

Seems to me Rubin, Corzine, and their cronies are helping their pal Davis out.

[randita]

Ernest_at_the_beach and I check the major CA newspaper web sites every day. I don't recall seeing a thing about this or I would definitely have posted it.

Obviously, there was no press release about it.

Do you have an idea of how the ratings and the interest rates stack up against similar offerings?

[snopercod]

No. Robert357 is our bond guru, and he's on vacation. Maybe these other guys know.

[jimtorr]

Do you really have to ask why media were silent? They're looking after a democrap in office, of course.

This may actually be necessary, with the state budget the way it is. Or should I say, isn't? When do the state legislator's start having their salary docked for not passing a budget, like happens in Tenessee?

[snopercod]

Even the Wall Street Journal is silent. I don't know about Investor's Business Daily, since I don't subscribe any more.

When do the state legislator's start having their salary docked for not passing a budget, like happens in Tenessee?

They are paid monthly, as I understand it, and will not be getting a check at the end of July.

STATE CONTROLLER KATHLEEN CONNELL OUTLINES RISKS ASSOCIATED WITH BUDGET DELAY

"Unfortunately, legislative employees will once again become early victims of a no budget scenario," said Controller Connell. "If a budget is not passed by July 12, these individuals will not be paid. Similarly, vendors that serve the State will begin to face cash-flow pressures, with local governments following shortly behind. Each day the budget stalemate continues, more people, businesses and local programs are affected. And, every day of a delayed budget draws closer the possibility that Court action could cause the rest of the State's workforce to be paid minimum wages."

[bert]

The article below seems to indicate the Wall Streeters may have some problems.... Where are the revenues to be anticipated?

California's Economy Could Collapse
State Budgeteers Ignoring New, Ominous Numbers
By Daniel Weintraub
Sacramento Bee Columnist
7-19-2

A little more than two weeks ago I wrote a lengthy column exploring the possibility of a fiscal meltdown in California, a gap between spending and revenues so great that the state might be unable to pay its bills or borrow without supervision from Wall Street.

At the time, I described such a scenario as remote. But developments since June 30, I believe, make a financial debacle more likely than it was when I last addressed the topic. The Legislature and Gov. Gray Davis, while it's the last thing they want to do, need to address the situation before it is too late.

The governor's Department of Finance reported last week that revenues in June came in $407 million, or 5.7 percent, below forecast. And that was a forecast made in early May. If the governor's best prediction was that far off in so short a time, how can he possibly trust anything his advisers are telling him will happen next December, or in April 2003? The June shortfall came on top of a bad May, when revenues were $250 million below estimates that had been finalized even as the month had already begun.

And it's not just the amount but the reason that's cause for concern. Income-tax withholding -- perhaps the best barometer of current economic activity -- was down nearly 7 percent in June from what was expected.

The sales tax also fell short. In May and June combined, revenue from that source is off $214 million, or about 5 percent.

Those numbers are real, and in the books. They confirm anecdotal evidence that suggests California will be lucky to see a broad-based economic recovery take hold by the end of 2002.

Leaders of the state's tech economy told the New York Times in a story last week that they don't expect their sector, increasingly important to California, to recover until perhaps the end of 2003. Intel Corp. announced Tuesday that it would reduce its work force by 4,000 employees this year as revenues continue to slide. Apple Computer confirmed that it had laid off 7 percent of its workers at an Elk Grove plant as earnings fell by nearly half from the same quarter a year ago.

The stock market, meanwhile, continues what appears to be a free-fall. Having already lost 11 percent in the quarter ending June 30, the Dow Jones Industrial Average has slid another 8 percent since that day. The technology-heavy Nasdaq Composite, which fell 20 percent in the second quarter, was down another 6 percent through Tuesday.

The market selloff presents two dangers to the state's fiscal condition. One is direct -- that capital-gains taxes and taxes on stock options, which fueled a revenue boom in the late 1990s, will fall short of even their meager targets in the coming fiscal year. The other fear is that declining stock values will produce a reverse "wealth effect," prompting consumers to pull back on personal spending as they watch the value of their portfolios shrink.

All of this would be bad enough even if the state were not about to pass a budget that contains a structural, $10 billion gap between spending and revenues that has been largely papered over with loans, shifts and gimmicks. But that's what is on the table now, and, absent some dramatic development, that's what will be approved some time this summer.

If the numbers in May and June represent a trend that continues through the fiscal year, the state's shortfall a year from now could be $20 billion or more.

Any sensible manager would be taking steps at this point to guard against further deterioration in the state's fiscal position. At a minimum, the Legislature and the governor should enact triggers that would automatically enact deep and, yes, painful spending cuts if the numbers continue to slide through the rest of the summer and into the fall.

They might want also to consider triggers that would return taxes to the levels of 1998, before they were cut with a sense of bravado amid surpluses driven by the surge of tax revenue from stock market gains that have now disappeared.

If lawmakers fail to take one or both of these measures, the situation could spin out of control before they return after the November elections. But interviews this week with the key players suggest that neither the Legislature nor the governor is in any mood to change course.

Finance Director Tim Gage says he will "continue to watch the numbers closely" in the weeks and months ahead but plans to propose no corrective action. Assemblyman Darrell Steinberg of Sacramento says it would be "very difficult" to reopen the budget even as the Democratic leadership and the governor are seeking to secure the four Republican votes needed to pass the current, flawed version of a spending plan for the fiscal year that began July 1. And while Republican legislators complain accurately that the budget is a time bomb waiting to go off, they have yet to offer a concrete proposal to defuse it.

If this keeps up, the state's budgeting and accounting will make Enron's finances look positively responsible in comparison.


The Bee's Daniel Weintraub can be reached at (916) 321-1914 or at dweintraub@sacbee.com.

http://www.sacbee.com/content/opinion/story/3621695p-4647717c.html

[snopercod]

Obviously, there was no press release about it.

Well, the information I posted was a press release, supposedly posted over a month ago. Apparently, none of the news organizations chose to do a story on it.

While I was looking at the HTML of the press release for the date and time it was posted, I discovered this in the &ltTITLE;> News Release - June 18, 2002 - STATE CONTROLLER KATHLEEN CONNELL RESPONDS TO MISINFORMATION CONTAINED IN CAUSE NEWS RELEASE.

What the heck is "CAUSE"?

[snopercod]

Thanks for posting that. Here's one for you:

CALIFORNIA'S BLACK-RUPTCY [IBD Editorial] from May 12, 2001.

The fiscal recklessness shown by California’s politicians may be unsurpassed by any state in American history.

[Ernest_at_the_Beach]

Thanks for the ping.

Been busy and then had a family emergency that now seems resolved.
So just getting back!

I didn't see any press release where I usually look, Rough & Tumble primarily and then many california freepers will send notes giving leads.

So I would say there are a lot of us watching stuff out here in the general publications so I would suspect some highly specialized publications - bond newsletters, etc, contained the news releases.

[snopercod]

Any theories on why this story seems to have been totally ignored by the press?

[snopercod]

Why did the WSJ not cover this? Is Al Hunt in total control now?

[monkeyshine]

These are short term. The interest is very low. It's just a place for big money to park cash over the next 6 months, earning minimal interest while they wait for something more attractive next year. That they can find so many people willing to compete for $6B loans for less than 2% means there are very few attractive investments for big money right now.

I wonder how well they would do with those $11B worth of 20 year bonds? 2% would seem rediculously low for such long term instruments. I figure that it would have to pay at least 5-7% to be attractive over such a long term, just to beat inflation. And inflation may come back soon and bite us all in the ars.

[monkeyshine]

That is no surprise to me. I own a small business that does a lot of export. Money is tight because importers of my product have had a hard time paying me due to the strong dollar. So I haven't paid myself in 3 months. (now that the dollar is falling the money is coming in better so don't worry about me just yet).

But what that means is the state didn't get any money from me, even though I am fully employed. Their projections will be off because they can't calculate this sort of arrangement into their budget. I imagine that there are many small businesses doing the same thing I am -- deferring payments to the principals because of cash flow considerations. I will get paid eventually, but maybe not in this fiscal year. That will screw up the state's planning.

[Elle Bee]

we'll just drop a dime then

.

[snopercod]

Thanks. Rebecca Smith used to cover this kind of thing. She did a good job, IMO.

[Robert357]

The final credit rating should be real interesting. It sounds like there was lots of money previously in the stock market that has been pulled out and is not in liquid funds that the investment banking community wants to find a nice moderate term and interest bearing home for.

I find the following rating of Washington state bonds quite interestings on the S&P website.

What follows is for academic interest in the study of interest rates and economic theory.

SAN FRANCISCO (Standard & Poor's) July 15, 2002--Standard & Poor's said today that it removed from CreditWatch and affirmed its double-'A'-plus rating on the State of Washington's outstanding $8.25 billion in general obligation debt based on the state's adoption of a 2002 Supplemental Budget, which balances the 2001-2003 biennial budget and revises revenue projections over February estimates.

In addition, Standard & Poor's assigned its double-'A'-plus rating to the state's $184.46 million in new general obligation debt, to be sold July 23. However, both the new and existing ratings were given a negative outlook based on the state's economy, which appears to be lagging behind the national economy to a greater extent that was thought earlier in the year.

"While the state's budget is now balanced, this reflects the use of one-time revenue and expenditure adjustments for 50% of the $1.5 billion budget gap," said credit analyst Gabriel Petek. "However, the diversity of the state's economy combined with a history of sound financial management gives Standard & Poor's comfort in confirming the double-'A'-plus rating," he added.

Standard & Poor's said that a rating downgrade could result if the state's economic recovery falters or is too weak to restore balance to the budget using recurring revenues rather than one-time adjustments.

The state's rating was originally placed on CreditWatch on March 19 because of the budget deficit, caused by lowered revenues due to the national and state economic slowdown. The new debt will be used for financing various capital projects throughout the state and for housing assistance, weatherization, and affordable housing project expenditures.