California 8/15 
EXECUTIVE SUMMARY:
ï¿½	More Revenue Bonds Sought in California
ï¿½      MOU Developments

BONDS

State Controller Kathleen Connell has requested $5.7 billion in revenue anticipation bonds with a term of one year or less.  These bonds do not require legislative approval; there does exist blanket legislative authority to issue them, and they have been issued in previous years when there has not been a budget surplus.  They are considered a fairly routine instrument and would be secured against the general revenues of the state.  However, while this is theoretically not the same revenue stream as the larger revenue bond issuance, in reality these bonds will likely (if issued) be repaid with the proceeds from the revenue bonds.  

It is not surprising that Connell made this request (rather than Angelides), given that she is frequently seen as "off the reservation."  Connell is clearly concerned about cash flow problems in the General Fund and wants to repay it as quickly as possible.  Whether she really needs $5.7 billion to do this is debatable.

The real signal that Connell is sending here is that she has no confidence that the larger revenue bond issuance will take place in a timely manner.  Specifically, there is growing concern in Sacramento regarding the utilities' court challenges to the PUC and DWR and the impact they may have on the revenue bonds' ability to sell.  These court actions (and the associated appeals) could be a serious barrier to the larger revenue bond issuance, which now will likely take place in October at the earliest.

While Connell is seen as a "difficult" person, she is not seen as irresponsible; her "demand-request" (as Angelides described it) has not provoked outrage in Sacramento, meaning that others share her concern about the need to pay back the general fund in a timely manner.

The bonds requested by Connell will likely somewhat dilute the market for the larger revenue bond issuance, in that they will be sold on the California tax-exempt bond market.

MOU Developments

The legislature still appears to be no closer to putting together a modified MOU that will pass both houses and bailout SoCal.  Now that the transmission asset sale has been dropped on the Assembly side, there will be no "hot dog for the dollar," which is what the Senate (and Burton in particular) has advocated.  With nothing tangible given in return for the bailout, the Senate will be even more unlikely to pass an Assembly bailout.  This is commonly known as a "legislative lob"; one side passes something it knows the other side will reject.

Since the legislature recessed, two things have become apparent to observers: 1) The wrong deals were made earlier in the crisis to secure power.  Things were rushed, and the state is now paying the price.  2) Corruption and conflicts of interest exist in the crisis, particularly on the governor's side.  Some parties involved stand to benefit from bailing out SoCal.

Both of these issues will likely serve to signal legislators to slow down and carefully consider any move they make when they return from recess, regardless of pressures put on them by the utilities or the governor's office.


