Market News International: California Watch

13:28 EDT 07/21

{California Watch: $26 Billion Budget Deal Reached>}

–Lawmakers to vote on Calif. budget deal Thursday

–Two-third vote needed to approve California budget deal

 

By Chris H. Sieroty

 

   LOS ANGELES (MNI) – California is expected to stop printing IOUs

after Gov. Arnold Schwarzenegger and lawmakers reached an agreement on a

plan to close the state’s $26.3 billion budget shortfall.

 

   The governor and lawmakers announced the compromise late Monday,

almost three weeks after the state began issuing IOUs to thousands of

state contractors and vendors. So far California has issued more than

$661 million in IOUs, according to the state controller’s office.

 

   A vote on the agreement, which is composed of cuts, borrowing and

fund shifts without raising taxes, was expected Thursday. The deal will

need to receive a two-thirds vote in both the state Assembly and Senate

before it’s send to the governor’s office for his signature.

 

   Assembly Speaker Karen Bass, D-Los Angeles, and other legislative

leaders urged lawmakers to approve the compromise plan, describing it as

the best way to close the state’s budget deficit and prevent further

decline of the state’s credit rating, which is already the worst in the

nation.

 

   “These are painful solutions for all Californians and many of the

cuts we have to make would be unthinkable if we weren’t in the midst of

an unprecedented and ongoing recession that is plaguing our nation and

our state,” Bass said. “But despite a two-thirds vote requirement that

hamstrings our ability to pass responsible revenue solutions, we’ve

prevented irreparable harm to our schools and prevented the proposed

elimination of California’s safety net.”

 

   The compromise includes billions in cuts to education, health care,

prisons, welfare and other programs. The rest of the deficit will be

made up by a combination of borrowing from local governments, shifting

money from other government accounts and accelerating the collection of

certain taxes.

 

   Schools will take a $6 billion cut, but won a commitment to be paid

back $9.3 billion in cuts from previous years. The agreement also cuts

$2.8 billion from the University of California and California State

University systems, $1.2 billion from the corrections department, and

$1.3 billion from MediCal funding.

 

   Schwarzenegger and Republican lawmakers were able to uphold their

vow of no new taxes with a series of accounting shifts, borrowing and

fund shifts. The state will extract $4.4 billion from local governments’

revenues — about $2.1 billion in borrowing by suspending Proposition

1A, $1.3 billion in redevelopment dollars, and $1 billion in transfers

from local gas taxes.

 

   Schwarzenegger also succeeded in having a proposal to expand oil

drilling off the Southern California coast for the first time in 40

years included in the budget agreement. Under that plan, drilling would

be allowed from an existing rig off the Santa Barbara coast, generating

about $1.8 billion in revenue.

 

   Some 200,000 state government employees already have been ordered

to take three days off a month without pay, the equivalent of a 14

percent pay cut. Those furloughs will continue through next June,

shutting many government offices for three Fridays a month.

 

   “This is a budget that has no tax increases and a budget that is

cutting spending,” Schwarzenegger said Monday. “We’re protecting

education and making government more efficient and cutting waste and

abuse. All around this is a really great achievement.”

 

   California’s latest budget crisis came less than five months after

negotiations resulted in tax increases and spending cuts to eradicate a

$42 billion budget shortfall. Since then, California’s deficit has

spiraled as soaring unemployment and one of the worst home foreclosure

crises in the United States have sent state revenues declining to levels

not seen since the 1990s.

 

   Personal income fell this year in California for the first time in

70 years, leading to a 34% plunge in income tax revenue during the first

half of the year. The $26.3 billion shortfall amounts to nearly 30% of

the state’s general fund, the account that pays for day-to-day state

services.

 

                  ** Market News International **

 

[TOPICS: M$$CR$,M$U$$$]


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The Business Press: Homebuilder begins ‘infill’ effort in Upland

By Chris H. Sieroty 

Contributing Writer

Trumark Cos. has established a new company called Trumark Homes to take advantage of the downturn in the real estate market by acquiring infill properties in distressed communities statewide, according to a company executive.

Michael Maples, principal at Trumark Homes and co-founder of its parent company Trumark Cos., said current economic conditions have created an opportunity for his company to acquire distressed properties because they are “unencumbered by the financial challenges faced by existing builders.”

The privately held firm’s first acquisition was 4.38 acres of land at 15th Street and Benson Avenue in Upland, where it will develop a project of 39 courtyard-style homes called Wyeth Cove. Maples declined to release the purchase price or seller but said the property was “a short sell with Comerica Bank.”

Since Trumark Homes is able to build on land that was purchased on good terms — often at below replacement cost — it can afford to sell homes at prices as much as 50 percent below what the market would have priced them at in 2005, the company said in a statement.

The single-family homes will range in size from 1,717 square feet to 2,401 square feet, with construction scheduled to begin in August. Maples said the homes, which will be priced between mid-$300,000 and low $400,000, were expected to open early next year.

“In this case we bought finish lots that already had been permitted by the city,” he said. “At the top of the market, these homes would have been priced in the mid-$600,000. It’s also a price point that will allow buyers to meet federal loan limits at least for 2010, which are about $425,000 in Upland.”

Maples described Trumark as a builder that was initially targeting distressed markets. Its projects will include town homes and small-lot detached and traditional single-family housing.

“We are looking to build in constrained markets that are close to job centers and have an older housing stock,” he said. “In Upland, about 90 percent of the homes were built before 1989. There is demand for new home projects.”

In April, the median home price in Upland was $379,000, down 15.8 percent from $450,000 from the same month a year ago, the California Association of Realtors reported. As of mid-June there were 838 properties in various stages of foreclosure — defaults, auction, bank-owned and houses for sale — in Upland, according to figures compiled by RealtyTrac Inc.

The single-family homes in Upland will range in size from 1,717 square feet to 2,401 square feet, with construction scheduled to begin in August.

Maples said the reduction in home prices, distressed property assets and the credit crisis have created opportunities in the land market, which provided Irvine-based Trumark with the ability to acquire lots at a cost that could lead to a profitable return when sold. Besides the firm’s Upland property, Maples told The Business Press the company has bought or contracted to purchase 200 properties in California over the past 90 days.

He said the company looks for properties in older communities where re-sales are more of an issue than foreclosures.

Since Trumark Homes is able to build on land that was purchased on good terms — often at below replacement cost — it can afford to sell homes at prices as much as 50 percent below what the market would have priced them at in 2005 before the real estate market crashed, the company said in a statement.

“A down real estate market is the perfect time to launch a homebuilding company since relationships have changed from old builders to new builders,” said Gregg Nelson, a principal with Trumark Homes. “We are at a competitive advantage, where investors are seeking to work with us.”

Currently, Trumark Homes is underwriting its deals using private equity and does not expect to acquire debt until next year. Maples said once banks become more confident and start lending again, the company will seek low-leverage construction loans for current and future projects.

“We believe that banks will be interested in lending to us because our devalued assets will offer significant loan security and upside potential. In addition, most of our projects will be located in niche markets where there is no competition,” Maples said.

Market News International: California Watch

15:48 EDT 07/07

California Watch: State IOUs Sought On eBay,Craigslist;Pay 3.75%>

–Regulator’s Respond to Offers for IOUs

–Would-by Buyers seek Calif. IOUs on Craigslist, eBay

–Calif. Treasurer Issues IOU Trade Rules

–CalPERS Not Affected by State’s IOUs

 

By Chris H. Sieroty

   LOS ANGELES (MNI) – Buyers of California IOUs will have to prove they are the legal owners of the promissory notes to cash them in when they mature in October.

   That was the warning Tuesday from State Treasurer Bill Lockyer’s office after reports that the IOUs, or registered warrants, were being sought by third parties on Craigslist and eBay.

   Tom Dresslar, spokesman for the treasurer’s office, told Market News International the treasurer’s office won’t redeem the state’s IOUs without a notarized bill of sale signed by the payee whose name appears on the note. He said Lockyer had asked Craigslist, eBay Inc. and any other marketplace that helps sell the IOUs to post a notice of the policy on their sites.

   About $3.4 billion in IOUs are expected to be issued this month because California legislators have been unable to close a $26.3 billion deficit in the state budget. The first in a series of notes were issued late last week to residents who are owned tax returns from the state.

   The IOUs carry an interest rate of 3.75 percent payable after Oct. 2. That high interest rate has attracted investors hoping to profit by buying them at a cheap rate and redeeming them later.

   The idea is that investors will pay less than the face value to businesses or individuals that receive IOUs but need cash immediately to meet payroll or pay other expenses. Once the IOUs mature, the investors will cash them in for their full value plus the 3.75 percent interest the state is offering.

   “We buy California IOU’s. Got shafted by California with an IOU check? Need cash NOW? We buy California issued IOUs and give you cash IMMEDIATELY at $0.85 per dollar,” reads one ad on Craiglist, surrounded by classifieds seeking the likes of a Serta full or queen mattress and an Xbox 360 game console.

   “Sell your government IOU for cash” advised the banner headline at a brand-new Web site, BuyMyIOU.com.

   For now, most IOU holders can simply deposit them. A number of major banks including Bank of America, Wells Fargo and Citibank will accept IOUs until July 10. But the banks haven’t said they’ll take IOUs after Friday.

   Dresslar said if banks don’t extend the deadline for accepting the state’s IOUs, recipients have two choices: either hold on to them until you are able to redeem them on Oct. 2 or sell them to someone other than your bank.

   “If you don’t need to cash it you hold on to it,” he said. “There are probably a lot of people who will pursue other opportunities to cash in the IOUs.”

   Meanwhile, retirees who get their pensions from CalPERS as well as CalPERS’ vendors are not affected by the state’s decision to pay some of its bills with IOUs.

   The California Public Employees’ Retirement System says retirees and beneficiaries will receive regular payments just like they have in the past. CalPERS employees, vendors, contractors, investment managers, health plans, and other providers of goods and services will also receive regular payments.

   The state’s plan to pay some of its bills with IOUs, officially called registered warrants, is caused by a cash shortage in the state General Fund. CalPERS is a special fund agency and is, therefore, not affected, it says.

   With approximately $182 billion in assets, CalPERS is the nation’s largest public pension fund.

 

             ** Market News International **