Bloomberg News

California’s Debt-Issuance Drought Will Stretch Into This Year

January 08, 2012

Jan. 6 (Bloomberg) -- California bond sales this year will remain at levels well below those of 2009 and 2010, as Governor Jerry Brown attacks what he calls a “wall of debt.”

While the nation’s most-populous state will sell $5.2 billion of general-obligation bonds in 2012, up 18 percent from 2011, that amount is far less than was issued in either of the two preceding years, according to Tom Dresslar, a spokesman for state Treasurer Bill Lockyer.

In 2009, the state sold $20.5 billion in general-obligation debt. The amount fell by almost half in the following year, to $10.4 billion, Dresslar said.

Brown, 73, yesterday proposed retiring $6.3 billion of the “economic recovery” securities voters authorized in 2004 and sold when Republican Arnold Schwarzenegger was governor. Brown aims to pay off those bonds by 2016. Reducing state indebtedness is crucial to building investor confidence, Brown said at a press briefing to unveil his proposed $92.6 billion general-fund spending plan for fiscal 2013, which begins in July..

“That’s one thing I’m really committed to,” the Democrat said. “We see what’s going on in Europe. We see the pathetic situation in Greece.”

Continued restraint in bond issuance may raise prices on Golden State bonds already outstanding, according to Bud Byrnes, president and chief executive officer of RH Investment Corp. in Encino, a part of Los Angeles.

Scarcity Effect

“Relative to other markets, California will trade up,” Byrnes said by telephone yesterday. “Because of scarcity, I would expect it to trade higher relative to other bonds.”

California state and local debt returned almost 15 percent last year, according to a Bank of America Merrill Lynch index that measures price changes and interest payments. That’s more than the 11 percent earned by the overall U.S. municipal market.

Brown’s pledge will please voters who’ve had to tighten their own belts, according to Michael Shires, who teaches public policy at Pepperdine University in Malibu. The governor is also proposing increases in income and sales taxes.

“He’s trying to promote a theme of accountability,” Shires said. “Bond retirement has become part of that theme -- that there’s fixed amount of money we can spend.”

Those betting on the state include mutual-fund operator Pacific Investment Management Co., or Pimco, in which California debt made up almost 15 percent of its Municipal Income Fund at the end of October, according to a report filed yesterday. That was up from about 8 percent at the same point in 2010.

--With assistance from Michael B. Marois in Sacramento. Editors: Ted Bunker, Pete Young.

To contact the reporters on this story: Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net; James Nash in Sacramento, California, at jnash24@bloomberg.net; Alison Vekshin in San Francisco at avekshin@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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