California will borrow $5 billion today through a temporary loan as U.S. states make plans to cope with any credit-market disruption should lawmakers fail to raise the federal debt ceiling by the Aug. 2 deadline.
Proceeds from California’s bridge loan will help pay bills until the state can sell cash-flow notes that had been scheduled for late August. New Mexico is asking agencies to complete requests for federal reimbursement by midday July 29 to ensure the it can get repaid, and Maryland was forced to cut $206 million off a planned bond sale as the debt talks dragged on.
“Given the uncertainty in Washington with the debt ceiling, the treasurer felt it was prudent to get a bridge loan,” said Tom Dresslar, a spokesman for California Treasurer Bill Lockyer. “We couldn’t have planned on the president and Congress taking us to the brink.”
States and local governments face higher borrowing costs if Congress fails to reach a compromise by the deadline. Because the U.S. borrows money through the sale of Treasury notes to pay its bills and refinance maturing debt, it could default if the limit isn’t increased. That might cost the government its top- ranked credit score, upend financial markets and send interest rates higher.
Moody’s Investors Service has said it may lower its top ratings on Maryland, South Carolina, New Mexico, Tennessee and Virginia because their dependence on federal revenue makes them vulnerable to a U.S. credit cut should talks to raise the debt limit fail.
Moody’s has also said another 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade.
“It would ultimately cost taxpayers in Virginia more” if the state’s rating is cut, said Jeff Caldwell, a spokesman for Virginia Governor Bob McDonnell, a Republican.
Without the ability to borrow, the federal government would have to cut about $134 billion of spending in August, according to a report by the Washington-based Bipartisan Policy Center, which advocates politically balanced policy making. That could prompt the government to choose which payments to make, such as Medicare subsidies, which may affect California’s cash flow.
New Mexico takes in about $500 million of federal funds each month for programs such as aid to unemployed workers and forestry. The New Mexico Board of Finance last week gave the treasurer the authority to issue tax-and-revenue anticipation notes if federal money is cut off and the state runs out of reserves.
Card to Play
“We anticipate we do have money in reserves and we are not alarmed, but this is just another card to play,” said Tim Korte, a spokesman for New Mexico’s Finance and Administration Department.
The prospect of an upheaval in the credit markets has some states and local governments avoiding them. Municipal-bond issuance scheduled for the next 30 days is projected to shrink to about $6.3 billion in the next month, the lowest daily gauge since it reached a 2011 high on July 14, according to Bloomberg’s index of 30-day visible supply.
If no solution is reached, municipal-debt sales may drop further, said John Hallacy, the head of municipal research at Bank of America Merrill Lynch in New York.
“A lot of issuers who are contemplating entering the market will hold back to see what will happen in the aftermath -- at least the ones who can,” he said. “We have no benchmark to look at, no history for this kind of thing. Obviously to the extent investors become more skittish, it would require offering higher yields.”
Maryland Cuts Sale
Maryland yesterday reduced a bond sale planned for this week by $206 million to remove a refunding component. Patti Konrad, Maryland’s director of debt management, said in a telephone interview that the state would postpone indefinitely the planned advance refunding as the refinancing may not generate enough savings. The state is still offering about $512 million of securities this week.
California’s Lockyer had planned on borrowing about $5 billion through revenue-anticipation notes, or RANs, at the end of August to pay state bills until the bulk of tax revenue comes in later in the years. Without those short-term securities, the state may run out of cash, as it did in 2009, when it issued $2.6 billion of IOUs.
Facing market turmoil that could boost the state’s borrowing costs if he waited until August, Lockyer instead will accept competitive bids from investment banks, commercial banks, credit unions and investment funds for a private $5 billion loan today.
California used a similar $6.7 billion bridge loan from JPMorgan Chase & Co. (JPM) and five other banks in October, when a record 100-day budget impasse prevented Lockyer from issuing RANs. The state paid 1.4 percent on the October loan, or $6.7 million of interest, until it was repaid when Lockyer sold $10 billion of RANs at the end of November.
He will repay the new loan once he is able to sell RANs.
“It seems like an expensive strategy but this is probably a better time than any to have to use this strategy,” said Kelly Wine, executive vice president of Encino, California-based RH Investment Corp. “It’s probably a cautious play, and given the size of the deal it’s probably the smart way to play it. But there’s a cost involved in that.”
Still, California Governor Jerry Brown said he is holding out hope that Congress and President Barack Obama will strike a deal.
“The federal government is not going to default,” Brown said in Los Angeles yesterday. “They’re going to do whatever they have to do. It’s unthinkable. Republicans will rise to the occasion along with the Democrats. They’re posturing because they’re getting ready for the election. But they’re not going to let the United State of America go down the drain.”
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Brown signs California Dream Act
New law covers private funding; governor signals he may also favor expanding public Cal Grants eligibility.
Following through on a campaign promise, Gov. Jerry Brown signed a law Monday easing access to privately funded financial aid for undocumented college students. He also signaled that he was likely to back a more controversial measure allowing those students to seek state-funded tuition aid in the future.
Assemblyman Gil Cedillo (D-Los Angeles), author of the private financial aid measure, described it as an important but incremental step toward expanding opportunities for deserving students who were brought to the U.S. illegally through no choice of their own. Cedillo is pressing ahead with a more expansive measure that would make certain undocumented students eligible for the state's Cal Grants and other forms of state tuition aid.
Brown said he was "positively inclined" to back that bill but would not make a decision until it crosses his desk.
"I'm committed to expanding opportunity wherever I can find it, and certainly these kinds of bills promote a goal of a more inclusive California and a more educated California," Brown told reporters after the bill-signing ceremony Monday.
For Brown, signing Cedillo's bill was a gesture of goodwill toward Latino voters, who helped elect him in large numbers last fall. Legislation providing education funding to undocumented students has been a top priority for many Latino groups, which have found many of their efforts thwarted so far at the federal level. Last year proponents failed to marshal enough votes in the U.S. Senate to ensure passage of the federal DREAM Act, which would have created a path to citizenship for illegal immigrants brought to the U.S. before age 16 if they attended a college or served in the military.
Brown's position on the California Dream Act was being closely monitored after he angered some prominent Latino leaders by vetoing a bill last month that would have made it easier for farmworkers to organize. Though Brown noted in his veto message that he signed legislation helping farm workers unionize during his first stint as governor in the mid-1970s, his veto was sharply criticized by the United Farm Workers, which counted the bill among their top priorities.
But several analysts who study Latino politics said the California Dream Act was far more important symbolically to many in the Latino community. Fernando Guerra, director of the Center for the Study of Los Angeles at Loyola Marymount University, said the bill was viewed by many as a measure of social acceptance of Latinos because it would increase opportunity for the best and brightest among the undocumented.
The California Dream Act has drawn strong support across the Latino community, said Jaime A. Regalado, director of the Pat Brown Institute of Public Affairs.
"If [Brown] was looking at the balance sheet, understanding politically that he needed to sign one of these measures, it was not going to be competitive," Regalado said. "It's seen as a civil rights issue in the Latino community, especially for youth. The farmworkers' struggle is not necessarily seen as what it once was. This is an issue of the now, an issue of the moment, part of the Latino agenda and part of the future."
But opponents of the legislation say it will diminish opportunities for U.S. students.
"Obviously it falls into a different realm when the money is coming out of private pockets than it does when it's coming out of taxpayers' pockets," said Ira Mehlman, a spokesman for the Federation for American Immigration Reform, a group that advocates halting illegal immigration, "but nevertheless, foundations and other institutions that get tax exemptions should not be promoting policies that encourage people to remain illegally in the United States."
During a signing ceremony at Los Angeles City College, Brown largely brushed over the thorny politics of illegal immigration and sought to frame the legislation as part of the struggle to maintain education funding during California's budget crisis.
"The debate is very clear: shrivel public service, shrink back, retrench, retreat from higher education, from schools, from the investment in people; or make the investment," Brown said. "This is one piece of a very important mosaic, which is a California that works for everyone."
Brown used the issue last year against his Republican opponent, Meg Whitman, during a Fresno debate.
After an undocumented student had asked the candidates to explain their position on such legislation, Brown said that he backed the proposal and that Whitman wanted to kick undocumented students out of college, adding "that is wrong morally and humanly."