Cal State system to sell $450 million in tax-free bonds

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Investor demand for California tax-free municipal bonds will be tested beginning Wednesday, when state Treasurer Bill Lockyer attempts to sell $450 million of bonds for the California State University system.

The bonds, to be sold in maturities of one to 30 years, will finance building projects on the 23 Cal State campuses.

These are revenue bonds, meaning they’re backed by revenue from the system, including student housing fees and parking fees. To credit-rating firms, that makes the bonds less risky than California general obligation bonds, which are backed by the state’s taxing power.

Moody’s Investors Service rates the Cal State bonds Aa3. By contrast, Moody’s rating on the state’s general obligation bonds is A1, which ties with Louisiana for the lowest rating among the 50 states.

Under Lockyer’s Buy California Bonds program, the state takes orders from individual investors ahead of orders from institutional investors. Individuals can put in orders Wednesday; on Thursday, after institutions bid for the bonds, the state will set final interest rates on the securities. Individuals then can accept those final rates or cancel their orders.

Muni bond yields have been rising in the last two weeks amid a back-up in bond interest rates in general, as investors’ appetite for muni and corporate IOUs has cooled. That could make the Cal State issues more appealing for yield-hungry investors.

Ross Berger, a bond fund manager at Wells Fargo Bank, estimated that Cal State bonds maturing in five years might pay an annualized tax-free yield of 3% or more; the 10-year bonds might pay about 4%, he said.

California muni bond interest is exempt from federal and state income tax.

To order the bonds, investors must go through a brokerage; the state doesn’t take orders directly. The minimum order is $5,000.

Go here for more on the Buy California Bonds program.

-- Tom Petruno