IssuesPA

October 1 2010
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PEL Central has been following the the state's use of Tax Anticipation Notes, or TANS, that it went to the markets for in FY2010. The same instruments are being used to manage cash for in FY2011. Two articles reprinted below from its "News and Views" blog examine the situation.

The Commonwealth Taps the Capital Markets As Its ATM (8/31/10)

PEL has discussed the impact of the changes that have taken place in the financial markets over the past two years, for example, the changes that have occurred in the credit markets with respect to municipal finance, and the impact of these changes on state and local governments.  The current issue of News and Views focuses on cash at the state level.

An important indicator of the fiscal condition of the Commonwealth for the 2009-2010 fiscal year that has received little attention was the state’s use of tax anticipation borrowing for the first time since the 1998 fiscal year.  In December 2009, Pennsylvania went to the capital markets to borrow $800 million in tax anticipation notes (TANS).  These TANS were issued under the authority of the Fiscal Code and were designed to smooth the differences between receipts of funds by the Commonwealth and payment of ordinary and ongoing expenses by the Commonwealth.

Table 1
General Fund tax Anticipation Notes
Fiscal Year 1994-1998 and 2010
(in millions)

Fiscal Year Principal Amount of Notes Issues General Revenue Estimates Actual General Revenues TANS as a Percent of Estimated Revenues
1994 $400.0 $15,172.1 $15,210.7 2.6%
1995 $600.0 $15,765.3 $16,224.7 3.8%
1996 $500.0 $16,268.7 $16,338.5 3.1%
1997 $550.0 $16,744.5 $17,320.6 3.3%
1998 $225.0 $17,451.6 $18,123.3 1.3%
2010 $800.0 $28,568.7 $27,648.2 2.8%

SOURCE: Commonwealth Official Statement, December 22, 2009

The timing of receipts and payments under the Commonwealth’s current fiscal structure means that revenues tend to be received in an uneven pattern, with large receipts in the later months of the fiscal year (April through June), while payments are distributed more evenly throughout the fiscal year.  Payments are particularly heavy in August, October, December, February, April, and June when the Commonwealth makes the statutory subsidy payments to the state’s school districts.  For the 2009-10 fiscal year, the TANS were needed to provide the cash flow to make these and other payments due to the decline in revenue received by the Commonwealth in the General Fund.  The TANS were paid in May and June of 2010, the last two months of the fiscal year.

General Fund receipts declined by 4.1 percent in the 2009-10 fiscal year from the original budget estimate.  General Fund revenues are projected at $27.5 billion for the 2010-11 fiscal year, a decrease of $0.8 billion from the 2009-10 total of $28.3 billion.  The most direct impact of these declines on the Commonwealth’s fiscal position is a substantial decrease in the state’s cash flow and cash position.  As with private sector businesses, the Commonwealth needs cash to operate, to pay payroll, to make the various subsidy and transfer payments to local governments and school districts, to pay vendors and contractors, and to buy the myriad goods and services that are essential to the functions of the state.  Revenue declines mean more than debates about budget reductions; these decreases mean that there is less cash immediately available for operations at the state and at the local level as well.

The 2010-11 budget as adopted does not significantly provide for new revenue to increase the Commonwealth’s cash position.  PEL expects that the Commonwealth will need to return to the capital markets in 2010-11 for TANS, possibly as early as September or October.  The size of the 2010-11 TANS may also exceed the $800 million borrowed in 2009-10.  The Commonwealth may need to borrow as much as $1 billion or more and may use more than one series of TANS to access the capital markets to generate the cash flow necessary for ongoing operational needs.

The Commonwealth borrowed $800 million in TANS and $1.9 billion in long-term bonds during the 2009-10 fiscal year, a total of $2.7 billion in funds acquired from the capital markets.  The State’s cash position, budget projections, infrastructure needs, and other commitments portend a similar journey in the 2010-11 fiscal year.

The costs of acquiring both short-term and long-term funds are low by historical standards and the Commonwealth maintains excellent ratings from the major credit rating agencies.  Using the capital markets to manage the State’s cash position is a sound fiscal practice, but a practice that requires vigilance and a continuing knowledge and appreciation of the impact of these markets on the Commonwealth’s fiscal reputation.

 

Table 2
General Fund Cash Balances * (unaudited)
Fiscal Year 2002 – Fiscal Year 2010
(in millions)

Fiscal Year Ended June 30 Official Revenue Estimate Actual Revenues Revenue Variance Beginning Cash Balance Ending Cash Balance Ending Balance Variance
2002 $21,328.3 $20,059.6 $-1,268.7 $3,670.0 $1,914.5 $-1,755.5
2003 21,812.1 21,314.5 -497.6 1,914.5 2,671.4 756.9
2004 22,191.3 22,828.0 636.7 2,671.4 4,242.9 1,571.5
2005 23,866.5 24,308.5 442.0 4,242.9 3,804.4 -438.5
2006 24,989.9 25,854.3 864.4 3,804.4 4,218.0 413.6
2007 26,799.5 27,449.3 649.8 4,218.0 4,836.0 628.0
2008 27,760.6 27,928.1 167.5 4,836.0 4,547.4 -288.6
2009 28,784.4 25,529.8 -3,254.6 4,547.4 2,442.9 -2,104.5
2010 ** 28,824.7 27,648.2 -1,176.5 2,442.9 3,164.9 722

SOURCE: Commonwealth Official Statement, December 22, 2009


*   Ending balances do not include the Budget Stabilization Reserve Fund.
** Estimated from Department of Revenue and Office of Budget reports.

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As Anticipated, the Commonweath is Back for Cash (9/30/10)

In August 2010, PEL published a News and Views article (The Commonwealth Taps the Capital Markets As Its ATM) about the Commonwealth’s use of Tax Anticipation Notes (TANS) for the first time since the 1998 fiscal year.  In the 2009-10 fiscal year (year ending June 30, 2010), the Commonwealth borrowed $800,000,000 in TANS, short-term notes issued in advance of taxes and revenues to be received by the state.  These short-term notes are issued by states and municipalities as cash flow management tools used to smooth the differences between receipts of revenues by the Commonwealth and payment of ordinary and ongoing expenses.

In the article, PEL analyzed the cash position of the Commonwealth and suggested that the state’s cash flow situation indicated that the Commonwealth would need to return to the capital markets in the 2010-11 fiscal year for additional TANS.  “PEL expects that the Commonwealth will need to return to the capital markets in 2010-11, possibly as early as September or October… The Commonwealth may need to borrow as much as $1 billion or more … to generate the cash flow necessary for ongoing operational needs.”

Just as PEL anticipated, the Commonwealth’s Office of the Budget has announced a planned sale of $1,000,000,000 Tax Anticipation Notes, First Series of 2010-2011, that will be held on October 5, 2010.  The Office of the Budget also announced that $386,535,000 General Obligation Refunding Bonds will also be offered for sale on October 6, 2010.

As PEL remarked in the August "News and Views" article, the Commonwealth’s cash position, infrastructure needs, and lack of new revenue would require a similar journey to the capital markets in the 2011-12 fiscal year in order to raise the necessary funds.  PEL has and will continue to follow the fiscal position of the Commonwealth as the state increases its reliance on the capital markets to acquire the funds needed for both short-term operations and long-term projects.

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Visit PEL Central's monthly "News and Views" blog for more topics.

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