LOS ANGELES — California will ride a multi-billion surplus and strong economy into the market when it prices $989 million in general obligation bonds Sept. 6.
State officials have estimated the state has a roughly $8 billion surplus.
“Eight years of strong budget management simultaneous with a growing economy, a booming stock market and (for six years) a tax increase on the state’s high-income taxpayers have dramatically improved California’s budget position,” S&P Global analysts Gabriel Petek and David Hitchcock wrote in an Aug. 23 report.
The state maintained Aa3 ratings from Moody’s Investor Services, AA-minus from S&P Global and AA-minus from Fitch Ratings. All gave stable outlooks.
The $989 million sale is split into three tranches: $106.4 million in taxable GOs, $28.4 million in taxable refunding GOs and $854 million in tax exempt GO refunding bonds.
Public Resources Advisory Group is the financial adviser and Orrick, Herrington & Sutcliffe is bond counsel.
Bidding is being split into three time slots. Bid group A will go until 8 a.m. PDT. Bid Group B until 8:45 a.m. and Bid Group C until 9:30 a.m. PDT.
California nearly doubled the amount of taxables it sold in first half 2018 compared to first half 2017, according to Tim Schaefer, the state’s deputy treasurer of public finance.
“Remember that in 2009, at the depths of the great recession, there was a various and concerted effort on the part of all of the leaders in the state to push out as much bonded indebtedness as we could muster for shovel-ready projects,” Schaefer said.
The state is coming up on the 10-year anniversary of that, and has been working to exchange debt sold then with cheaper interest rates.
The state has been working to refund that debt — to avoid a big bubble of maturities ($5.25 billion to $5.5 billion) coming up in 2019, partly related to the Build America Bonds program, Schaefer said.
It also aims to smooth maturities on its overall debt program, he said.
Calling up to $5.5 billion in refundable bonds in an escalating interest rate environment, in a short period of time, could increase the state’s risk – which is why they have been chipping away at it, Schaefer said.
“That is why we elected with obvious candidates to issue taxable bonds,” he said.
Though S&P gave the state a stable outlook, it always adds some caveats to the state's ratings, because of its volatile revenue stream. It has a strong dependence on income taxes — particularly those received from high-net residents. It's dependence on capital gains for a significant chunk of revenues ties its fortunes to the stock market. And means big swings up when the markets are booming — and swings down when it falls.
"While California's fiscal position is much improved, we attribute its post-recession gains to a combination of cyclically favorable economic conditions, the current governor's emphasis on reserve accumulation, and its current (nonpermanent) tax policy," S&P analysts wrote. "The main downside risk we see to our rating on the state through out two-year outlook horizon is the potential for unanticipated economic and fiscal stress coinciding with a new administration that places less priority on maintaining the state's fiscal balance."
California Gov. Jerry Brown terms out in November.
Moody's said its rating balances "the state's improved financial position against its exposure to a highly volatile revenue structure and its vulnerability to changes in federal policy and funding, especially with regards to healthcare."
"The State of California is by far the largest state in the U.S. Its $2.7 trillion gross domestic product accounts for 14% of the nation's economy," Moody's analysts wrote. "It's population of 39.6 million accounts for 12% of the nation's population."
The state has always sold taxables, according to previous interviews with Schaefer, but the loss of advance refundings makes it a good move now.
Only about $135 million in this sale is taxable, however.
The proceeds of the bonds will be used to refinance outstanding general obligation bonds for debt service savings and to pay outstanding commercial paper notes issued to fund capital projects.
