PHOENIX – California's $2.7 billion general obligation bond sale will meet plenty of demand amid market scarcity and an increasingly confident view of the state's financial strength.
The GO bonds are scheduled to price in a negotiated deal Aug. 30, with JPMorgan and Bank of America Merrill Lynch leading the underwriting syndicate.
The general purpose bond deal is expected to include $2.09 billion for refunding, with the remainder being new money.
"We want to refund all we can refund," said Tim Schaefer, California's deputy treasurer for public finance.
The market environment points to a very successful sale despite mixed signals about California's fiscal situation.
"It's going to go like hotcakes," said Marilyn Cohen, chief executive officer at Envision Capital Management. "No question about it."
Fitch Ratings upgraded California GOs Aug. 12, raising them one notch to AA-minus from A-plus with analysts citing evidence that the state is now "fundamentally better positioned to withstand a future economic downturn."
That upgrade came just more than a year after a similar one-notch bump from S&P Global ratings, which also has California at AA-minus. Treasurer John Chiang hailed the upgrade as a sign that analysts are continuing to recognize the state's progress toward fiscal sustainability. Moody's Investors Service assigns and equivalent Aa3 rating.
Another positive trend stems from rising property values.
In July, county assessors released their annual property tax rolls, and assessments showed significant growth, particularly in the northern part of the state.
While the California State Board of Equalization is slated to release final figures later this month, many counties reported growth that could push total property tax receipts beyond what Gov. Jerry Brown assumed in his revised budget release in May.
Strong property tax revenue strengthens the state's hand by providing a source of education spending that prevents the state from having to dig deeper into its pockets to hit its legally-mandated K-12 spending level.
But not all has been well with the state's finances. The California Department of Finance announced Tuesday that state revenues were $330 million off expectations in July, a continuation of a recent trend as that was the third straight month that the state's revenues missed the mark set in the state budget.
California's unemployment rate also increased by 0.2% to 5.4% in June, the first increase since September 2010.
Despite the Brown administration's progress in building up budget reserves, California's income-tax heavy revenue structure remains highly volatile.
A recent S&P study said the reserves would be insufficient to fully cover revenue shortfalls in the rating's agency's economic stress scenario.
There have also been negative rumblings from the state's pension funds, with both the California Public Employees' Retirement System and the California State Teachers' Retirement System reporting investment returns well below their assumed rates.
While both systems' officials say one year's results are not significant because of their long-term focus, others have warned that the funds are going to become more and more underfunded and eventually transform a large liability into a potential crisis.
Stanford lecturer and president of legislative advocacy group Govern For California David Crane warned again this week that the pension situation could lead to a harsh economic reality for California down the road.
"Like a coiled spring, the more pension liabilities are suppressed when created, the harsher they snap back over time," Crane wrote on his blog. "The consequences fall hardest on young people as tax revenues go to old debts rather than new services."
Despite these softening revenue trends and mixed signals about the economy's overall strength, market participants seemed confident that California's paper would be very eagerly sought.
"I think the sale will be extremely well received," said Tom Schuette, partner and co-head of investment research & strategy at Gurtin Municipal Bond Management. "While the state's revenue trends have softened, I think investors recognize that the state's fiscal position is strong and that the state's finances have been well-managed in recent years. Should the downturn in revenues continue, we believe the state will respond prudently and cautiously. Beyond the fact that the market sees the state's credit quality as strong, we also believe the upcoming sale will benefit from an extremely strong appetite for California paper that is unlikely to diminish anytime soon."
Envision Capital's Cohen said California's offering would be very popular with institutional investors even if some retail investors might be more hesitant.
Cohen said a market shortage will make buyers eager to get in on California's sale, although her firm will not be among them.
"To find paper is just like digging for gold," said Cohen. "It's very difficult. There's just a lack of paper out there."
Cohen said that the recent Fitch upgrade might help reassure some retail investors, but that institutional buyers have tended to treat California above its rating anyway.
"The institutions will be there to scoop it up," she said. "They've been very forgiving in muniland."
Schaefer said that he preferred not to speculate on how recent events might affect the sale or how well the sale would be received by the market, but noted that market conditions have been and continue to be good for many issuers.
"Generally speaking, we observe that we, like many other issuers positioned like California, are deriving the benefit of spreads that have tightened considerably over the last several months," Schaefer said.
The state has two more 2016 GO sales scheduled after this one: a $200 million floating-rate deal in late September and another competitive sale of undetermined size in mid-October.
