SAN FRANCISCO - California's budget struggles are likely to pressure local government agencies and districts that need to issue tax and revenue anticipation notes this year, according to a Standard & Poor's credit comment released yesterday.
The agency hasn't changed its rating criteria, but issued the comment paper in response to many questions from market participants as to how the state budget - which defers many payments due to local governments and school districts - would impact Trans.
"We felt that it's a helpful thing to provide this explanation," said author Gabriel Petek.
One of the key questions arises from the state's action in postponing constitutionally required payments to school districts from February and June to July, thereby moving them onto the books of fiscal year 2010 from fiscal 2009, which ends June 30. In all, California deferred $3.24 billion in such payments, according to Department of Finance documents.
That has two effects, Petek said. One is that some school districts are experiencing current-year cash shortfalls, which they may choose to resolve by issuing Trans.
The other involves state law governing Tran issuance.
"Because we believe California law is unclear whether cash disbursements of state apportionments received in a given fiscal year may be 'attributable' to a prior fiscal year, and thus whether such disbursements constitute revenue legally pledged to support Trans issued in the prior fiscal year, in rating Trans we typically do not include such deferred cash in our credit analysis," according to the comment paper.
Because the cash shortfall created by the deferrals potentially affects one fiscal year while the cash receipts will occur in another fiscal year, Standard & Poor's does not believe it's clear to which fiscal year the receipts are attributable, according to Petek.
As a result, the agency will request a bond counsel opinion to the effect that the Trans and the state payments can legally be attributed to the same fiscal year.
"Once we have that in hand, we have the normal rating criteria," Petek said.
Though state lawmakers adopted a fiscal 2010 budget plan months ahead of time, "further significant deterioration" of state revenue may throw that plan out of balance, according to Standard & Poor's.
"If this occurs, the state could revert to additional unplanned disbursement delays that we believe could jeopardize Tran repayment," the paper said.
One outcome could be more tax and revenue anticipation note issues rated at the SP-1 level, as opposed to SP-1-plus, Petek said.
"You may see more SP-1s, and part of it may be more of these [credit] challenges, and part of it may be that there are more issuers," he said.
Tran issuance in California usually peaks during the period before the commencement of a new fiscal year, and tends to increase in years of budget stress, according to Standard & Poor's, citing DPC Data, which says Tran issuance increased 39.8% during the state budget crisis of 2003.
