Coming to a town near you....municipal commercial paper!<G>
This could pressure short term rates, even with BubbleBoy vowing to keep rates low...
quote.bloomberg.com
04/17 17:00
Oregon's Debut Note Offer May Signal Record-Breaking Season
By Dennis Walters
Salem, Oregon, April 17 (Bloomberg) -- Oregon's first-ever sale of short-term debt, $781 million to cover a budget deficit, may foreshadow a record year for similar issues by states and other municipalities with shortfalls.
Oregon is building up cash reserves after a slowing economy pushed its unemployment rate to 8 percent for the first time in nine years. Lower-than-expected tax collections produced a budget deficit of almost $1 billion.
Most states are in the same boat, facing a combined $27 billion shortfall in the current fiscal year, the National Conference of State Legislatures reported yesterday. Municipal bond analysts expect deficit-ridden states, counties, and cities to issue similar notes at levels that match or exceed last year's record of $56.2 billion.
``There's no question that last year was extraordinary,'' with note borrowings about 40 percent higher than in a typical year, said John Hallacy, managing director of municipal bond research at Merrill Lynch & Co. ``Chances are we'll have more note issuance this year,'' perhaps surpassing $60 billion.
More than half the states, including Oregon, have had to address deficits equaling 5 percent or more of their operating budgets, the legislative report said, and the outlook for the new fiscal year beginning July 1 isn't much brighter.
California, which sold a record $5.7 billion revenue anticipation notes in September, may need an even larger sale this year, Hallacy said, and a multibillion-dollar offering by New York City also is possible.
Cash Management
Even in the best of years, many states, school districts and other municipalities manage their cash flow with notes that are repaid by future tax revenue. Public spending for salaries and other operating expenses remains roughly level month to month. By contrast, revenue varies for several reasons, including property tax collection that bulges in December and April.
Money from the tax and revenue anticipation notes lets municipalities cover spending during months when their cash flow is small. The notes, which derive their name from anticipated tax revenue pledged to pay the debt, usually mature in a year to 15 months.
Many states and municipalities offer such notes closer to midyear, around the time when fiscal 2003 begins. Municipal note sales fell to their lowest level in a decade in 2000 -- after years of economic growth generated budget surpluses -- then surged last year once tax collections began dropping.
``While the economy may start turning the corner, state budgets tend to lag'' a recovery because tax collections don't pick up for several months, said Arturo Perez, senior policy specialist with the National Conference of State Legislatures. Most states now forecast that the slide in tax revenue will end in the current quarter, he said.
Borrowing Costs
The pressure to borrow has a silver lining -- municipalities are still benefiting from 11 Federal Reserve interest rate cuts in 2001. Oregon sold its tax anticipation notes today with a one-year yield of 2 percent. That's more than half of a percentage point less than what muni borrowers paid at the peak of last year's note season in June, and half what similar notes yielded two years ago.
A 2 percent tax-free yield translates into a taxable equivalent return of 3.58 percent for an Oregon resident in the top federal and state tax brackets.
The Federal Reserve probably won't need to raise rates any time soon, in part because inflation pressures are ``largely absent,'' Fed Chairman Alan Greenspan told the Joint Economic Committee of Congress today.
Still, many investors expect ``that rates are going to start rising'' by mid-year or soon thereafter, said William Ahern, who manages $60 million in a money-market fund at Eaton Vance in Boston. ``Maybe some issuers are going to want to get in the game a little earlier'' to capitalize on current rates.
The note sales are only one way states expect to get through tougher times. Twenty-six states have also tapped rainy-day funds, the legislature report said, and at least 40 states have cut or expect to reduce spending to help balance their budgets. |
