California, the most-indebted U.S. state, began a $2 billion tax-exempt general-obligation bond sale as income taxes, which account for 63 percent of revenue, outpace projections.
The state, which plans to raise $1.25 billion for capital projects and $750 million for refinancing debt, is taking orders from individual investors today. Sales to institutions such as mutual funds and final pricing will take place tomorrow, said Tom Dresslar, a spokesman for Treasurer Bill Lockyer.
California’s second general-obligation sale this year comes as individual income-tax payments have exceeded both projections and 2012 levels before the April 15 filing deadline, according to figures compiled by Controller John Chiang. California debt is becoming safer as the state economy rebounds and Governor Jerry Brown and lawmakers reduce long-term obligations, said John Ceffalio, municipal credit analyst for New York-based AllianceBernstein Holding LP (AB:US), manager of $443 billion in assets.
“For this fiscal year to date, it looks solid and is running above estimates,” Ceffalio said of California revenue. “There’s always a chance of an April surprise on one side or the other. Long-term, there’s always a chance of volatility owing to the progressive nature of California’s income tax.”
California is offering bonds maturing in October 2023 to individual investors at a preliminary yield of 2.33 percent, according to a person with direct knowledge of the sale. That’s about 0.5 percentage point more than the interest rate on benchmark 10-year munis, similar to the spread on California’s borrowing last month, data compiled by Bloomberg show.
In the March offer, Lockyer had to raise yields on some bonds with longer maturities amid a slump in state and local debt. Yields on 20-year securities rose to 3.57 percent from 3.39 percent as a 10-day rally in the Dow Jones Industrial Average depressed the bond market.
Munis have become more attractive to investors since then, even as volume remains high as issuers take advantage of low borrowing costs to refinance, said Michael Schroeder, president and chief investment officer of Naples, Florida-based Wasmer Schroeder & Co., which manages $3.5 billion in local bonds.
“This is a better time to bring a deal,” Schroeder said by telephone. “Cal paper has performed well. There’s a higher demand for it with the higher income taxes.”
California voters in November raised income-tax rates on individuals earning $250,000 or more, with levies on incomes of $1 million or more increasing 3 percentage points, to 13.3 percent.
Brown, a Democrat who backed the tax increases to fund education, said in January that California would have an $851 million budget surplus at the end of June, its first in more than a decade.
Through Feb. 28, California’s income-tax collections for the year that began July 1 exceeded projections by $4.5 billion, according to figures from Chiang’s office. As of April 5, state income-tax payments exceeded 2012 levels by almost $10 billion, or 29 percent, according to Chiang’s office.
While the trend is encouraging, investors continue to view California debt with caution, Schroeder said. The volatility of income-tax receipts in California was exacerbated by the increases on the highest earners and by one-time events such as the initial stock offering by Facebook Inc. (FB:US) in May, he said.
“We tend to place some significance on those numbers,” Schroeder said of the income taxes, “but you have to look at the overall picture of what is behind those numbers.”
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