Volume I, No. 7

December 18, 2008

PMIB Votes to Freeze Disbursement of Funds to Infrastructure Projects Already Under Way

The Pooled Money Investment Board (PMIB), comprised of the Director of the Department of Finance, State Treasurer, and State Controller, met on December 17, 2008 and froze disbursement of existing loans for specified infrastructure projects, including 900 K-12 projects approved by the State Allocation Board that are either under way or ready to start. We believe the action taken yesterday will have an immediate affect on only 200 to 300 projects. However, if the action is not reversed by February, then more projects will be affected; if not reversed by summer, then over 1,000 projects could be affected. This list of affected projects is on the C.A.S.H. website at: www.cashnet.org/news/2008/PMIB08.pdf.

The PMIB also voted to delay approval of any additional requests for loans until the PMIB meets again in early January.

In 1987 the Legislature enacted AB 55, which authorized the Pooled Money Investment Account (PMIA) to make loans for state bond programs, primarily state General Obligation Bonds (including those under the authority of the State Allocation Board) and State Public Works Board Lease Revenue Bonds. The loans are repaid from the proceeds of either a long-term state bond issue or issuance of commercial paper notes. If the State Treasurer is unable to sell state bonds, the PMIA is unable to be repaid and eventually runs out of cash.

Due to the delayed enactment of the 2008-2009 State Budget and the state’s current fiscal crisis, the State Treasurer has been unable to find buyers for the GO bonds or Lease Revenue Bonds. Consequently, as of December 8, 2008 the amount of un-reimbursed AB 55 loan expenditures has risen to an all-time high of $5.1 billion. If the state is unable to issue GO or Lease Revenue Bonds for the remainder of the fiscal year, the amount of AB 55 loan expenditures would reach $9.5 billion by June 2009. The PMIB staff recommended that the cumulative future disbursement of AB 55 loans after the December 17, 2008 meeting not exceed $500 million in order to keep the PMIA from going negative by June 2009.

In addition to freezing any further disbursement of PMIA funds, the Governor’s representative to the PMIB stated that he would meet with the Governor the afternoon of December 17 and recommend that the Governor direct all state agencies and departments that currently have AB 55 loans to cease entering into any new construction, grant, loan or other agreements that commit expenditure of funds from the PMIA or GO bond funds.

The PMIB directed Department of Finance and State Treasurer's Office staff to present recommendations at the PMIB meeting in January for winding down each AB 55 loan in a manner that will reduce future loan expenditures to the greatest extent possible without subjecting the state to unacceptable penalties or legal action. School district representatives and representatives from the construction industry testified that there could be heavy penalties to school districts and other public works projects if construction worked ceased because the flow of funds for their projects was cut off.

The PMIB stated that they recognized the dire consequences of not funding the many public works projects, but they were unable to loan money they did not have or to sell bonds that currently have no buyers. State Treasurer's Office staff testified that both the short-term state cash flow problem and the longer-term balanced State Budget structural problems must be corrected before the market will once again buy California bonds, which will then replenish the PMIA and enable the PMIB to make additional loans for public works projects authorized by State General Obligation or Lease Revenue Bonds.

The PMIB will meet again in early January (a date was not identified) to assess the status of the state budget and the impact that it will have on future loans from the PMIA for infrastructure projects.

~Tom Duffy

tduffy@m-w-h.com