SAN FRANCISCO — California Gov. Jerry Brown's new budget proposes about $5 billion of general obligation bond sales this year, an increase of 18% from last year, when the state borrowed relatively little.
The increase seems small, especially considering the state sold $10.4 billion of GOs in 2010 and $20.5 billion in 2009, according to the treasurer's office, but it is not very far off the state's average over the last decade.
The governor's budget outlines a spring sale of $2.3 billion and a $2.9 billion sale in the fall.
"2009 and 2010 were anomalies, really," said Tom Dresslar, a spokesman for Treasurer Bill Lockyer. "The amount of issuance that the budget makes room for will be adequate to keep current projects going and start some new ones."
Over the last 10 years, California issued $87 billion of GO debt, averaging $8.7 billion a year and around 10% of market volume, according to Thomson Reuters.
Dresslar said the state expects to also hold its annual revenue anticipation note sale, but that it's too early to estimates its size. Last year, the state sold $5.4 billion of Rans in September.
California is the riskiest state credit, according to Standard & Poor's and Fitch Ratings, both of which assign it A-minus ratings. Moody's Investors Service rates the credit A1, two notches higher.
But even with its low ratings and the state's perceived financial troubles, California debt is still in demand, and that should persist with the current lack of new supply.
"There is huge demand for California bonds," said Bud Byrnes, chief executive officer of Los Angeles-based RH Investment Corp., a broker-dealer specializing in California municipal bonds. "By reducing that supply, California [GOs] trade in a range of a 70 to 75 basis point discount to the general market, and we expect that to tighten up probably to 50 basis points by the end of the year if not less."
On Thursday, the Democratic governor unveiled a $92.6 billion spending plan for fiscal 2013 that attempts to tackle a deficit of $9.2 billion with cuts and tax hikes.
Last year, California started the year with a $26.6 billion shortfall.
The governor hopes to raise $6.9 billion — $4.4 billion for the budget — by temporarily raising income taxes on those making more than $250,000 a year and by upping the sales tax by 0.5% to 7.25%. The tax measure would send 40% of the revenue to schools. The budget for the year starting July 1 would also include trigger cuts, as it did last year, in case voters shoot down the tax proposal.
Brown's budget would carve out $4.2 billion in spending cuts to mostly social services, and if the tax measure fails, more than $5 billion in cuts would hit school, universities and community colleges.
"For the second year in a row, the budget puts forward a package of potential solutions centered primarily on structurally oriented solutions," said Gabriel Petek, S&P's lead California analyst.
Petek said the governor's budget appears to have less political, legal and administrative risks compared to last year, which led S&P to closely predict the estimated shortfall for the next fiscal year. He said the state's one-time budget gap solutions, such as payment deferrals, that add up to $33 billion remain a major problem.
As usual, Brown's budget has run into political headwinds, drawing criticism from Republicans opposed to higher taxes and from within his own party, many of which don't want to see further cuts to education and social services.
"Together, we have made a giant dent in a once-overwhelming budget deficit. The price has been high for students, working families and those struggling to improve their lives. Those cuts have real consequences on the lives of real people, and I am wary of immediately continuing down that path," Senate President pro tempore Darrell Steinberg, D-Sacramento, said in a statement. The Legislature will begin budget hearings this month.
Brown's budget also said the administration has been working to use up bonding authorization. The Department of Finance has said it has used up more than $10 billion of unused bonding authority. According to the budget plan, hundreds of new infrastructure projects will be spurred by using the formerly idle authority before July.