$2-Billion State Bond Offering Sells Out, Signaling Confidence

California easily sold out a $2-billion general obligation bond offering Thursday, as institutional investors snapped up what was left after smaller buyers bought nearly half of the tax-free securities earlier in the week.

Despite the demand, the state decided against increasing the size of the offering.

General obligation bonds finance voter-approved infrastructure projects such as schools and parks. The securities, sold several times a year, are a test of investors’ willingness to extend credit to the state.

This week’s deal was closely watched because it came less than two weeks before voters will decide on a $15-billion borrowing plan to plug the state’s huge budget deficit.

The robust appetite for the general obligation bonds was a “first hint” that investors are betting the state’s fiscal outlook is on the mend, said Robert Pariseau, manager of the USAA California bond mutual fund in San Antonio.

Still, California’s poor credit rating -- the lowest of any state -- means it pays a steep price to borrow compared with other states. That interest cost is borne by taxpayers over time.

The bonds sold this week range in maturity from one year to 30 years. The 20-year bonds in the deal will pay an annual tax-free interest rate of 4.93%. By contrast, Pennsylvania on Thursday sold 20-year bonds paying 4.43%.

Pennsylvania has an AA credit rating from Standard & Poor’s. California is rated BBB.

Although rates on the California bonds were well above national averages, strong investor demand allowed the state to pay slightly lower rates than had been anticipated, said Rick Kolman, co-head of municipal bond underwriting for Goldman Sachs & Co., the lead manager of the sale.

He said the institutional buyers were a “very diversified” mix of mutual funds, insurance companies and other professional investors nationwide.

Small investors, who were allowed to put in orders for the bonds ahead of institutions, bought $876 million of the securities Tuesday and Wednesday. The above-average yields on the bonds appeal to many investors in an environment of relatively low interest rates, analysts said.

Although the state could have sold more bonds Thursday, the size of such offerings is pegged to the funding needs of infrastructure projects that are ready to go, said Juan Fernandez, chief of the public finance unit in the state treasurer’s office. He said the staff determined that funding needs didn’t merit raising more money.