Big bond deals ahead: California plans $4 billion in muni sales


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With investors’ appetite for municipal bonds ravenous again, California plans to dive into the market in March to borrow as much as $4 billion to fund infrastructure projects.

Treasurer Bill Lockyer is betting that changes the Legislature is expected to approve soon in how Sacramento manages its cash will forestall the risk of yet another cut in the state’s credit rating, which already is the lowest of the 50 states.


Lockyer has held back on bond offerings this year as the state has struggled to close a $20-billion budget gap. Ratings firm Standard & Poor’s in January cut the state’s credit grade one more notch, to A-minus from A, and warned that it might lower the rating further if it saw a cash crunch looming in March. A weaker credit rating could force the state to pay higher interest rates to borrow.

Lockyer’s spokesman, Tom Dresslar, said legislation has been introduced to give state finance officials “much greater flexibility” to deal with short-term cash-flow problems, by temporarily delaying payments to government entities companies and individuals owed money from the general fund. The idea is to keep a bigger cash cushion on hand for money owed to bondholders, whose payments are assured by the state constitution.

The state borrowed heavily via bonds in the fall as Lockyer sought to work down a big backlog of voter-approved issues that will finance schools, water facilities and other infrastructure projects. That backlog still is huge, at $47 billion. Note that proceeds from these bond sales go for designated capital projects, not to plug budget holes.

The March bond sales will be in two parts: In the first week of the month Lockyer expects to sell $2 billion in tax-free general obligation bonds of various maturities, aiming at individual investors through the state’s Buy California Bonds program. The minimum order usually is $5,000.

The second offering, also for about $2 billion, will be sold later in the month in the form of taxable issues, including “Build America Bonds” that are partly subsidized by the federal government and have been extremely popular with institutional investors.

As he has with other bond deals in recent years, Lockyer plans an advertising campaign to attract income-hungry individual investors to the tax-free offering, Dresslar said.


Muni market analysts say it’s a good strategy. Interest on the state’s bonds is exempt from state and federal income tax for California residents, and that exemption will be more appealing if Congress allows President Bush’s tax cuts for high-income earners to expire as scheduled next Jan. 1.

“People are looking to shield their money from the feds,” said Matt Fabian, senior analyst at research firm Municipal Market Advisors in Westport, Conn.

Illinois, which like California faces severe fiscal woes, this week sold $1.5 billion in tax-free bonds -- $630 million of which were bought by individuals, the state’s director of capital markets told Bloomberg News. Illinois had expected individuals to buy about $250 million of the bonds.

The current annualized yield on five-year California general obligation bonds is about 2.7%. In the 35% combined federal and state tax bracket that’s the equivalent of a 4.15% fully taxable yield. In the same tax bracket, a 10-year California bond, now yielding about 4.5%, would pay the equivalent of a 6.9% taxable bond.

The 35% combined bracket begins around taxable income of $137,000 for couples.

Naturally, the higher your tax bracket, the more appealing muni yields become.

-- Tom Petruno