–But Aggregate Amount of Note Issuance To Increase
–Texas, California, To Dominate Issuance

By Yali N’Diaye

WASHINGTON (MNI) – Despite the slow pace of the U.S. economic
recovery, rising revenues are improving cash flow margins for most
states, reducing their need to borrow for short-term liquidity reasons
in fiscal year 2013, Moody’s said in a report Tuesday.

While this should translate into a decline in the number of states
issuing cash flow notes, “the aggregate amount of note issuance will
increase,” the report said, dominated by California and Texas.

“As the number and size of short-term borrowings declined in fiscal
2012, California and Texas accounted for about 70% of the total dollar
amount of cash flow notes issued by states,” Moody’s said. “Even as the
economy improves, those two states will dominate the note issuance
market going forward as cash flow note issuance by other states
declines.”

Texas, at least, will see a declining issuance in FY2013 compared
with 2012, while California’s short-term note issuance is expected to
increase to $10 billion from $6.4 billion in FY2012.

“The increase reflects its intent to reduce the size of some
intra-year school district payment deferrals, which will weaken the
states cash compared to the prior year,” the report said.
“Additionally, last year the legislature expanded the funds that were
borrowable by the general fund for cash flow purposes, but those funds
will not be borrowable this year.”

When revenues flows — which tend to follow a cyclical pattern —
and spending flows — which are more evenly spread during the fiscal
year — do not match, states often issue short-term notes to fill the
gap.

In the case of Texas, issuance occurs even during periods of
economic stability “due to the particular seasonality of their revenues
and spending.”

So despite a decline in cash flow borrowing to $9.8 billion in
FY2013 from $10.3 billion in FY2012, Texas will still be a dominant
issuer.

Texas is not the only State to issue cash flow notes on a regular
basis. So are Colorado, Idaho, and Oregon.

The report also pointed out that cash flow note issuance is not the
only available cash management tool.

For instance, “Many states use borrowable resources outside the
General Fund, enabling them to maintain tight budgetary cash margins but
avoid short-term borrowing,” Moody’s said. “Others use lines of credit
or commercial paper programs to provide additional liquidity as needed.”

** MNI Washington Bureau: 202-371-2121 **

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