CALIFORNIA DEBT AND INVESTMENT ADVISORY DEBT LINE COMMISSION BILL LOCKYER, CHAIRMAN A source of California debt and investment information Volume 28, No. 11 November 2009 Inside this Issue: Page MEASURING THE EFFECTS OF Measuring the Effects of Recent Changes 1-2 RECENT CHANGES IN THE STATE’S in the State’s General Fund Balance GENERAL FUND BALANCE Lend Your Voice: The Future of the Public 2 Market for California’s Issuers John Decker In-Box: A Synopsis of Current Events in Public Finance 3-4 Executive Director “Will the American Recovery and Reinvestment Act 4 Resuscitate the Economy?” In the last ten years, the state reduce General Fund spending in consistently spent more than the coming years. 2009-10 Legislation Affecting Local Governments 5-15 it took in, creating an annual Solar Resource Guide Now Available 16 To assess the ongoing effects of deficit that it financed with “re­ Save the Date 16-17 sources” not derived from tax changes in expenditures, we com­ and fee levies. The Legislature pare expenditure estimates made Calendar of Issues 18-61 and Governor have taken steps by the Legislative Analyst’s Of­ in the last two years to close the fice (LAO) prior to the recession (in November 2007) and the De­ budget gap by reducing long- Figure 1 compares these two esti­ $132.9 billion in 2012-13. DOF partment of Finance after passage term expenditure trends. At the mates, and shows that DOF calcu­ now estimates that General Fund of the budget bills in July 2009. same, state General Fund rev­ lates that state spending will fall resources will fall from $92.9 enues have fallen due to the ef­ • In November 2007, the by at least $20 billion each year billion in 2010-11 to $74.3 bil­ fects of the recession. This arti­ LAO “forecast” expendi­ relative to the Analyst’s earlier lion in 2012-13. A comparison cle compares the relative effects tures rising from $120.4 estimates, for a three year savings of these estimates is displayed of these budget impacts. billion in 2010-11 to $135.6 of $72 billion. in Figure 2. DOF expects that, relative to the LAO’s 2007 es­ “Resources,” for purposes of billion in 2012-13. timates, General Fund revenues this analysis, may be revenues Revenues • Comparing these estimates will be $127.0 billion lower over derived from the state’s tax and to Finance’s more recent The recent recession and legisla­ the three year period. fee levies. They can be the sale numbers it appears that tive actions have reduced Gen­ of assets, such as this summer’s the 2009 agreement brings eral Fund revenues. Prior to the After accounting for the recent sale of its obsolete automobile expenditures down to $98.7 recession, the LAO estimated spending changes and the new fleet. They can be the proceeds in 2010-11 and $110.7 in General Fund resources to rise revenue estimates, it appears from securitizing future revenue 2012-13. from $117.1 billion in 2010-11 to that state’s three year General streams (such as proceeds from the lottery and tobacco settle­ ment). Or, as the current admin­ istration defines the term, they FIGURE 1 can be revenues “frontloaded” Comparison of General Fund Expenditures and collected earlier into the tax Estimates by LAO (2007) and DOF (2009) year. “Resources” can be the pro­ Dollars in Billions ceeds of a bond sale. 2010-11 2011-12 2012-13 Cumulative Recent Actions To Moderate Spending Growth Expenditures Estimated by LAO in 2007 $ 120.4 $ 127.7 $ 135.6 $383.7 Even though the 2008 and 2009 budget negotiations were consid­ Expenditures Estimated by DOF in 2009 98.7 102.3 110.7 311.7 ered especially difficult, the legis­ lature and governor took steps to Difference -$21.7 -$25.4 -$24.9 -$72.0 balance the 2009-10 budget and California Debt and Investment Advisory Commission, 915 Capitol Mall, Room 400, Sacramento, CA 95814, (916) 653-3269 Fund condition will erode by FIGURE 2 $55.0 billion. Comparison of General Fund Revenues, LAO (2007) Estimate and DOF (2009) Estimate Dollars in Billions General Fund Expected to Run Deficits for Next 2010-11 2011-12 2012-13 Cumulative Three Years The state will run annual defi­ Revenues Forecast by LAO in 2007 $117.2 $125.0 $132.9 $375.1 cits at least through 2012-13 and probably most years after that. Revenues Estimated by DOF in 2009 92.9 80.9 74.3 248.1 The legislature and governor can raise resources, cut spending, or Difference -$24.3 -$44.1 -$58.6 -$127.0 incur greater debt. In 2009-10, the state runs a $500 million reserve. Over time, how­ FIGURE 3 ever, the General Fund budget becomes unbalanced. The cu­ Total General Fund Reserve (June 30) mulative deficit, as displayed in Dollars in Billions Figure 3, is $6.9 billion in 2010­ 11, $22.4 billion in 2011-12 and 2009 2010 2011 2012 2013 $37.5 billion in 2012-13. DL -$4.5 $0.5 -$6.9 -$22.4 -$37.5 $0 • -$10 -$20 -$30 -$40 LEND YOUR VOICE: THE FUTURE OF THE PUBLIC MARKET FOR CALIFORNIA’S ISSUERS Angelica Hernandez • Has your agency’s debt issuance policies changed in response to CDIAC Policy Research Unit recent developments in the market? Congress created the Financial Crisis Inquiry Commission to examine • Some cite insufficient transparency as a contributing factor in the the domestic and global causes of the recent financial crisis. Former State crisis. Has your agency implemented any new policies to ensure Treasurer Phil Angelides chairs the commission. transparency when considering and approving the issuance of debt? In the same context, State Treasurer Bill Lockyer has asked CDIAC to re­ search what happened to California’s public issuers during the same period Market Professionals and find out what, if any, changes issuers may be implementing in light • How has your business changed since 2007? of the recent market events. CDIAC seeks intelligence from public and private professionals in addressing one or more of the following questions: • Have issuance patterns and instruments changed since 2007? CDIAC will use your responses to develop a major review of the market Public Issuers changes, as requested by the State Treasurer. Please send your respons­ • What situation did your agency experience during the recent mar­ es to CDIAC at [email protected] or contact Angel Hernandez at ket conditions? (916) 653-5896. •DL California Debt and Investment Advisory Commission November 2009 Page 2 IN-BOX A Synopsis of Current Events in Public Finance Treasurer Recommends Infrastructure Master Plan California Taps the Market State Treasurer Bill Lockyer released the 2009 Debt Afford- The State of California has issued almost $13.0 billion in short ability Report (DAR) entitled, “The Investments We Need term notes and long-term bonds in the past two months. The for the Future We Want: California Needs a Master Plan.” state sold $8.8 billion in Tax and Revenue Anticipation Notes In the report, the Treasurer calls for the adoption of a Cali­ (TRANs) in September and followed up a few weeks later with fornia infrastructure master plan, and recommends that im­ an additional $4.1 billion in long-term debt. provements to the state’s water works should be financed mainly by users, not the State General Fund. Last year, the Short-term borrowing. The $8.8 billion TRANs deal is the largest TRAN deal issued and according to Thomson Reuters DAR reviewed the market, including how the Treasurer’s 1 Office responded to limit damage to the state’s finances as ranks as second-largest municipal deal ever. The short-term well as to taxpayers. notes are due in May and June (2010), at interest rates of just 1.25% and 1.5%. Moody's Investors Service and Standard & According to the 2009 report, rising debt service payments Poor's gave the notes their highest short-term ratings, qualify­ will consume more than 10 percent of General Fund revenues ing them for purchases by money-market funds. in the middle of the next decade. The report includes the fol­ lowing points: Long-term borrowing. The state sold $4.1 billion in long-term debt in a combined offering of taxable, tax-exempt ($1.3 bil­ From 2010-11 through 2012-13, the state will issue an lion) and Build America Bonds (BABs). The BABs component estimated $44.1 billion in additional bonds backed by amounted to approximately $1.8 billion issued at 7.3% (4.75 af­ the General Fund. For the same period, the General Fund ter the 35% federal subsidy). The bonds carried ratings of Baa1 will have to pay a combined $23.2 billion in debt service (Moody's), A (Standard & Poor's), and BBB (Fitch Ratings). which includes bonds issued during the time frame and those bonds already outstanding. The state was forced to scale back the size of the deal by al­ most $400 million as benchmark yields for state and local gov­ Debt service payments as a percentage of General Fund ernment debt rose the highest levels in four months. The state revenues will grow from 7.7 percent in 2010-11 to 8.8 could have sold the entire $4.5 billion bond issue it planned if percent in 2012-13. it was willing to offer a higher interest rate but the State Trea­ surer opted not to. From the current fiscal year through 2027-28, the State will issue $226.0 billion of General Fund-backed bonds. For the California aggressively marketed both the TRANs and long- same period of time, the combined debt service on these term bonds debt in a multimedia advertising campaign on radio bonds and bonds outstanding will total $255.0 billion.