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California Could Triple New-Money Sales

TAHOMA, Calif. — California Treasurer Bill Lockyer estimates the state is going to more than triple its new-money general obligation bond issuance this fiscal year from the unusually low level the year before.

“The governor, and prudently so in the last couple years, has been more cautious when it comes to issuing new-money debt,” said Tom Dresslar, Lockyer’s spokesman. “Now we are back to a more normal level of issuance.”

The treasurer’s office estimates in its annual Debt Affordability Report released Monday that new-money GO bond sales will rise to $4.19 billion in fiscal 2013, up from fiscal 2012’s $1.29 billion.

Dresslar said bond sale estimates are preliminary, noting the treasurer’s office has a statutory requirement to produce an estimate on general-fund backed debt for the next two fiscal years.

He said the treasurer’s office “takes its marching orders” from the Department of Finance, which hasn’t yet completed its assessment of how much debt will be needed for the next two fiscal years.

Record low rates in the last year spurred substantial California refunding issuance. Of the $5.6 billion in GO bond the state issued in fiscal 2012 — $2.39 billion in fall 2011 and $3.2 billion this spring — only $1.29 billion of the fall issuance was new money.

California’s fiscal year begins July 1.

Typically one of the largest issuers of debt in the country, California reduced new-money issuance after Gov. Jerry Brown took office in January 2011.

California offered more debt than any other issuer in 2009 and 2010 — nearly $30.9 billion of GOs — but just under $10 billion since then.

Brown’s Department of Finance says it has focused on making sure that state agencies use the proceeds they have from previous issuances before more bonds are sold.

Now the state is now moving back towards a more “normal” issuance pattern.

The state treasurer expects to sell $4.19 billion of new-money GOs in the current fiscal year.

Its fall sale of $1.75 million, which grabbed all-time low interest rates, included $1 billion of new money. New-money GOs will increase to $5.27 billion in fiscal 2014, Lockyer’s office estimates in the report.

California’s GO bond spreads have tightened over the last year compared to the Municipal Market Data triple-A index as investors have looked for more yield in a tight market, though it remains the lowest-rated state by two of the three major credit-rating agencies.

The increasing load of debt service — the state said it has $73 billion of debt outstanding and $33 billion of authorized but unissued debt — could be an additional financial burden during difficult times.

Standard & Poor’s credit analyst Gabriel Petek said California’s existing debt levels have grown during the past decade, leaving the state with higher than average levels.

The state’s outstanding debt is equal to 5.1% of total personal income in California, compared to a mean for all states of 3.1%, according to S&P’s most recent report on state debt levels.

“The more pressing credit issue, however, is the debt-servicing burden,” Petek said.

He noted that California’s debt consumed just 3.3% of general fund costs in fiscal 2004, which compares to Standard & Poor’s estimate of 9.1% for fiscal 2013. However, that figures includes $2.1 billion of Proposition 1A debt from 2009 that the state is set to retire in June 2013.

Petek said California’s growing debt, coupled with its fixed costs, pension and health care expenses, and volatile revenue base, makes budgeting difficult.

California’s general obligation credit is rated A-minus by S&P and Fitch Ratings. Moody’s Investors Service rates California A1, one notch higher than it rates Illinois.

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