California Delays $1.5-Billion Bond Offering

California on Monday postponed a $1.5-billion general obligation bond sale three days after state legislators rejected Gov. Arnold Schwarzenegger’s plan to seek voter approval for $15 billion in bonds to finance a yawning budget deficit.

The $1.5-billion offering, planned for Thursday, will be shifted to early next year, after Schwarzenegger proposes a budget for the next fiscal year that begins July 1, state Treasurer Phil Angelides said.

Lawmakers at midnight Friday rejected Schwarzenegger’s plan to sell $15 billion in deficit-plugging bonds coupled with a spending cap. Democrats said the cap would require spending to be cut too much.

Investors have shown a strong appetite for California general obligation bonds in recent months despite the state’s budget woes. Proceeds from the bonds typically are used to finance long-term building projects, such as roads, prisons and schools.

Delaying the sale could cost the state if market interest rates jump early next year in anticipation of a credit-tightening move by the Federal Reserve sometime in 2004.

“Not too many [people] are going to tell you rates are going to be lower” beyond early January, said Stephen Kelleher, head of municipal underwriting at brokerage RBC Dain Rauscher’s San Francisco office.

“The environment was fairly conducive for the state to jump in” this week because interest rates have dropped recently, he said.

Indeed, yields on California bonds have declined since peaking in August. A Bloomberg News index that tracks average yields on 20-year California general obligation issues was at 5.03% on Monday, down from a high of 5.46% on Aug. 4.

Because interest on the bonds is exempt from state and federal income tax, the true yield is higher, depending on an investor’s tax bracket.

California bond yields have fallen in tandem with yields on long-term Treasury bonds, as investors in recent months have appeared less worried that the Fed might raise its benchmark interest rate soon.

The Fed meets today and is expected to keep its key rate short-term rate level at 1%.

But many analysts warn that investors are likely to send longer-term bond yields higher at the first sign that the Fed is leaning toward tightening credit.

California also could face investor demands for higher yields if bond rating companies, and investors, doubt that the state can get its long-term budget outlook in order, analysts say.

California, with the lowest credit rating and highest borrowing costs among the states, doesn’t need the bond money immediately because it uses short-term commercial paper as interim financing for schools and water projects, Angelides said.

A postponement will let the sale “be conducted in the context of more complete information about the state’s budget and fiscal picture,” he said.