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California Scales Back on Bond Sales, for Now Anyway

SAN FRANCISCO — California last year slipped to second place from its long-standing throne as the largest issuer in the country. And for good reason: it’s trying to get its fiscal house in order.

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But the trend may not last long, as the state has major infrastructure needs cueing up.

Gov. Jerry Brown has proposed only $5.2 billion of general obligation bond sales this year after issuing nearly $5 billion last year, which was down by half from 2010 and only about one-fourth of what it issued in 2009.

“The governor is hoping to reduce the debt load in our state so [issuance] has been a little smaller than recent historical trends,” state Treasurer Bill Lockyer said in an interview.

The downward trend is expected to continue, with state budget plans calling for the issuance of about $5.2 billion of new-money GO debt in 2012.

The Democratic governor has overseen less bond issuance as he has tried to make the most of what the state already has by asking agencies to use unspent bond proceeds before asking for more borrowing.

Brown has also frequently used the rhetoric of a “wall of debt” to describe the main enemy of a structural budget.

California passed a budget last year, the first on-time spending plan in five years, with fewer one-time fixes. It also relied on revenue projections that came up short and forced further cuts.

Still, some of the revenues failed to appear and the government still faces a $9.2 billion deficit this year, though that is less than half of what it faced a year earlier.

Outside of cuts, Brown hopes to eliminate a big chunk of the budget hole with a tax initiative he has proposed for the November ballot.

At least one rating agency has embraced California’s austerity.

Standard & Poor’s recently raised its outlook on the state to positive from stable, which is where the other two agencies have the credit.

But both S&P and Fitch Ratings still rate California as the weakest state credit in the country, while Moody’s Investors Service has the state two notches higher at A1 and above Illinois.

Lockyer, a long-time critic of the rating agencies, said he has asked when the state may get recognition for its budget.

“The answer basically is we need more than one year of evidence of change,” the treasurer said. “There is no reason California ought to be 49th based on any real measure. … I am hopeful that will correct itself with time.”

California sold $2 billion of refunding bonds earlier this month at yields significantly lower than two years earlier when the state was in fiscal chaos. The result is partly a reflection of a market that has seen record-low yields this year.

A general obligation sale set for next month will be another measure of where the state is at.

Lockyer said the state will consider more refundings this year.

“There is still a discussion if it will work in April or not,” he said. “There is a lot of refunding in the market right now so we might not save as much as we might hope to.”

Even though the Democratic Brown has been fiscally conservative the last two years, California is expected to issue more debt and retake the top spot.

Lockyer said even with substantial issuance over the last several years, California still has about $36 billion of authorized but unissued GO debt.

“We are the largest state with decades of [population] growth without infrastructure advancement,” the treasurer said. “So we are playing catch-up.”

Those infrastructure needs have driven the state’s voters to authorize more than $100 billion of bonds since 2000.

Lawmakers are also battling over two new major infrastructure projects that require massive amounts of bonding — an $11 billion water deal slated for the November ballot and $9 billion of bond funding for high-speed rail that voters approved in 2000.

As part of this year’s $92.6 billion spending plan, Brown has earmarked $5.4 billion, or 5.6% of general fund revenue, for annual debt service. In fiscal 2003, debt service was just $2.1 billion and 2.9% of revenue.

The state had $82.6 billion of general-fund-supported debt outstanding as of the end of June, according to the treasurer’s office.

The rising debt-service burden on the general fund is expected to continue through the end of the decade, according to the California Department of Finance, peaking at $7.5 billion in fiscal 2020.

Lockyer has been warning for years about rising debt-service costs, saying the state needs to identify other funding streams for capital needs.

“I have been urging policy-makers to add more discipline to rationing debt proposals,” the treasurer said. “The need is probably three times larger than the potential for tax-exempt financing.”

Coming Wednesday: The Michigan Finance Authority was the fifth-largest issuer last year as it sold $3 billion of short-term bonds to pay the state's unemployment insurance liability.

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