California, the largest issuer of municipal debt in the U.S., plans to save $248.1 million by not selling any general-obligation bonds until later this year, the first time first-half sales won’t occur since at least 1988.
Governor Jerry Brown, a Democrat sworn in last week, proposed a budget yesterday that assumes no general-obligation debt issuance until after the start of the fiscal year in July. The state has sold debt in the first half of every year since at least 1988, Tom Dresslar, a spokesman for Treasurer Bill Lockyer, said yesterday by e-mail.
“The bond-sale delay would not affect the thousands of infrastructure projects currently under way throughout California,” Dresslar said. “The state has sufficient bond moneys on hand to fund those projects through the end of 2011. However, the action could delay the start of an undetermined number of new projects.”
The state plans to sell $5.76 billion of general-obligation debt in the second half of this year, Dresslar said. In October, Lockyer estimated in a report that he would sell $12.3 billion of debt in the fiscal year that begins July 1, including $9.9 billion in general-obligation bonds. California had about $68.8 billion in the securities outstanding as of the end of June, according to Lockyer.
“The larger impact is the state has about $100 billion in voter-approved authorized debt that has not been issued,” Bud Byrnes, the chief executive officer of Encino, California-based RH Investment Corp., which underwrites and trades California municipal bonds, said yesterday in a telephone interview. “We’ve got infrastructure projects that will be put on hold because financing isn’t available.”
Foregoing Low Rates
“The state could save money on the interest costs on issuing the bonds” sooner, while rates remain low, Byrnes said. “We’ve got some of the lowest interest rates in the last 30 years right now,” he said. “It’s ironic that they would suspend issuance when the interest rates are low, when this would be the time to do it.”
The suspension of bond issuance came as part of Brown’s proposal to whittle down a $25.4 billion budget deficit forecast for the next 18 months. Brown, 72, said Americans had borrowed too much and must learn to live within their means.
The price of credit-default swap contracts on five-year California bonds fell the most in more than five weeks yesterday. A contract to protect $10 million of bonds maturing in five years fell 1.5 percent to $293,000 yesterday from about $297,600 on Jan. 7, according to data compiled by Bloomberg. That was the biggest one-day drop since Dec. 1.
California sold $10.5 billion of long-term bonds last year, including $5.9 billion in March through June, according to data compiled by Bloomberg. In the previous fiscal year, Lockyer oversaw sales of $13 billion of debt during those same months.
General-obligation debt service will cost the state $4.93 billion in the next fiscal year, even after the moratorium, Dresslar said.
Lockyer made sure to borrow enough last November to pay for a year of construction on projects being built, so work won’t be suspended and leave things half-built, Paul Rosenstiel, a principal with municipal-bond underwriter De La Rosa & Co. in San Francisco, said by e-mail.
“The delay seems consistent with the governor’s desire to find across-the-board budget savings for next year by delaying the payment of debt service on the next round of bonds,” Rosenstiel said.
California ranked second behind only New York in terms of debt per resident in the 10 most-populous U.S. states, at $2,362 as of June 2009, according to Lockyer’s October report, which cited Moody’s Investors Service data. California’s debt as a percentage of state economic output, at 4.73 percent, was also second to New York among the 10 biggest states, Lockyer said.
California shares with Illinois the lowest credit rating of any state from Moody’s. The A1 grade is Moody’s fifth-highest. Standard & Poor’s rates California two steps lower, at A-, its fourth-lowest level for investment-quality securities.
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