“If the muni market is most sensitive to supply, then we are in a fairly good position,” said Tim Schaefer, California’s deputy treasurer for public finance.

LOS ANGELES — California brings the largest municipal bond deal of the year so far with a $2.4 billion general obligation bond sale.

The deal will be priced for retail investors Monday with institutional pricing on Tuesday.

"There is still very strong demand for California paper in the market, especially when it comes in size," said Tom Schuette, partner and co-head of investment research & strategy for Gurtin Municipal Bond Management.

Though the state's ratings have not changed recently, Schuette said Gurtin "believes that the state's credit quality continues to strengthen as California has maintained solid fiscal discipline and experienced a sustained run of favorable revenue trends."

The deal includes $500 million in new money; advance refundings are expected to represent a significant chunk of the $1.9 billion of debt being refinanced.

The bonds are rated Aa3, AA-minus and AA-minus with stable outlooks from Moody's Investors Service, S&P Global and Fitch Ratings.

The state has $83.1 billion in outstanding general obligation bonds and lease revenue bonds. Fitch Ratings analysts wrote ahead of the sale that long-term liabilities are "currently a low burden on resources, although combined debt and pension liabilities are above the median for states at 7.9% of 2015 personal income."

The state employee pension plan has a 69.4% funded ratio and the teachers plan had a 70% funded ratio based on June 30, 2015 data, Fitch wrote.

Citi and Morgan Stanley are joint senior managers on a 30-member syndicate. Orrick, Herrington & Sutcliffe is bond counsel. Public Resources Advisory Group is financial advisor.

The size of the refunding could also mean that investors who are otherwise "full" on California state bonds will be looking to replace bonds they held that are being refunded, Schuette said.

The tick up in interest rates has made advance refundings an option for the state though it will current refund bonds when that is an option, because current refundings don't close the door on refunding the bonds again in the future, said Tim Schaefer, the state's deputy treasurer for public finance.

"Six months ago if you looked at a refunding candidate that was a year from being callable, you could invest (the proceeds in an escrow account until the bonds become callable) at a quarter percent," Schaefer said. "But today you could invest at close to 1%."

The ratio of advance to current refundings depends on the maturities investors are interested in.

"We won't know the number of advance vs. current refundings until we get the pricing scale from the underwriter," Schaefer said.

In February, volume was down 28% for the month on a year-over-year basis, Schaefer said.

"So at the moment, even though rates in general are higher, it would appear that supply is fairly manageable," he said. "If the muni market is most sensitive to supply, then we are in a fairly good position."

The state expects to issue $1.5 billion in bonds for its high speed rail project during the first half of the year, but bonds for that project are not included in this sale. Michael Cohen, director of the Department of Finance, needs to sign off on the rail authority's business plan approved by the rail authority board in January – a necessary step before bonds can be issued for the project. Cohen was coming up on the 30-day deadline to make a decision on Friday. Bonds for that project could be included in a different sale.

The sale also doesn't include bonds from the $9 billion K-12 school bond California voters approved in November. Gov. Jerry Brown had asked that the bonds remain unsold until the legislature develops better auditing procedures to track how the school construction bonds are used. Brown included language recommending changes to the legislature in the Feb. 1 trailer bill to the 2017-2018 budget he released in January.

The proceeds of the bonds are paying off commercial paper issued for clean water projects, disaster and flood prevention, children's hospitals, K-12 projects and housing, according to bond documents.

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