Hawthorne May Sell Tax Futures and Invest Cash

The city may turn its financial problems into financial profit by selling tax-anticipation notes at a low rate of interest and investing the money for a higher return.

Although such borrowing--a growing trend in California--is intended to ease cash flow problems of public entities with general fund deficits, such as Hawthorne, the city seems to be putting the emphasis on using the money to generate income.

“We are entitled to sell these notes; there is no risk, and all we will do is act like a bank and make money on the spread (the difference between the interest rate the city pays on the notes and the rate it earns on its investments),” said Councilman Steve Andersen, the major proponent of the notes. He said the city “should borrow the maximum as quickly as is consistent with shopping around.”

Officials estimate that if $3 million worth of notes are marketed within the next few weeks, Hawthorne could earn about $10,000 before notes must be redeemed at the end of the fiscal year in June. If notes are sold during the 1985-86 fiscal year, earnings could exceed $30,000 over the 12-month period, officials said.

Income is based on selling tax notes at 7.5% and investing the money at 12%. The city ended the 1983-84 fiscal year with an $850,000 deficit and is anticipating a $100,000 deficit this year. Reserves, which have been propping up the mid-December--the time when revenues bottom out. But reserves are expected to build up during the rest of the fiscal year.

An admission by officials that the city will have enough money to get through the fiscal year and that they regard the notes as a “cushion” has prompted Mayor Guy Hocker Jr. to oppose the sale of notes.

“We should say that we do or don’t have money,” Hocker said. “If we do, we do not need tax anticipation bonds. If we don’t, then we have to start addressing the issue that we are going to have to raise taxes, raise fees or cut salaries.”

Hocker voted no when the City Council directed the staff to put together a tax-anticipation-note package if it can obtain a favorable rating and if it is financially feasible to sell the bonds during this fiscal year. The city’s income projections are based on selling the notes at 7.5% and investing the money at 12%. Costs to market the notes are estimated at $30,000. The notes, which are tax exempt, are sold in anticipation of future revenues.

Tax-anticipation notes in California date from the 1950s, but their use accelerated in 1978 when Proposition 13 drastically reduced the property tax and has continued in the face of state and federal revenue cuts, according to municipal finance experts.

During 1984, according to the state Debt Advisory Commission, there were 104 issues of tax- and revenue-anticipation notes, totaling $1.3 billion, by local jurisdictions: cities, school districts, counties and special districts. State agencies brought the total to 606 issues and $11.6 billion. (The figures do not include December.)

Crocker Bank’s public finance department, which is assisting Hawthorne with the note package, said in a report that tax-anticipation notes are “being used by more and more municipalities to maximize the use of their cash resources in the current tight economic environment.”

Likening the notes to a “company line of credit,” Roderick A. Carter, assistant vice president, said, “Any city that has a deficit and hasn’t issued these has not taken advantage of the opportunity of smoothing out its cash flow.”

Since 1981, Crocker has managed or been a consultant on note issues for 18 clients, including the state, counties, cities, school districts, a water district and a student loan corporation.

Hawthorne appears to be the only South Bay city now planning to use of tax-anticipation notes, but between 1976 and 1979, Gardena sold three issues of such notes totaling nearly $5 million.

Gardena Finance Director Keith Bennett said the city “ran out of money” after building a community center. “The first thing we did to survive was issue notes,” he said.

El Segundo has had general fund deficits for the last three years, according to Jose Sanchez, city finance director. He said the deficits have been covered by reserves and, more recently, by increased fees and charges.

“We are not considering tax-anticipation notes, although we might in the future,” he said.