California may not sell bonds in 2011 if budget battle drags on
California’s budget woes could keep the state from issuing any new general obligation bonds this year, Treasurer Bill Lockyer is warning.
That would be another blow to the state economy if the result is delayed funding for voter-approved infrastructure projects.
But a lack of bond issuance by California could help the tax-free municipal bond market overall, which still is trying to recover from a blistering sell-off by investors in late 2010 and early 2011.
The state in recent years has been the largest single muni bond issuer nationwide, as Lockyer has sold debt that voters have authorized for new education facilities, roads and other projects. California issued $10.4 billion in general obligation debt last year alone. It has a backlog of $37 billion left to sell.
But Lockyer in January canceled his usual spring sale of bonds as part of Gov. Jerry Brown’s plan to pare the state’s huge budget deficit.
Instead, Lockyer agreed to limit general obligation bond issuance to $5.76 billion this calendar year, and that the sale wouldn’t occur before fall.
Now, even that bond offering may be canceled.
As The Times’ Anthony York wrote from Sacramento on Thursday, Brown’s proposal for a June ballot initiative to advance his budget plan may not be approved by the Legislature.
Brown wants to ask voters to OK a five-year extension of certain tax increases to fill part of the budget gap. If the measure fails to make the June ballot, Brown is considering other ways to get it on the November ballot, York reported.
Without a balanced-budget deal in hand, however, Lockyer would be unlikely to try to sell bonds before the election, his office says. Even if the measure passed in November, it isn’t clear whether there would be enough time to get a deal together before the end of the year, said Tom Dresslar, Lockyer’s spokesman.
A lack of bond issuance by California would further limit the supply of new muni securities hitting the market this year. As many investors have fled the muni market since November, spooked by predictions of rising muni defaults in 2011, some state and local governments have been forced to pull back from borrowing plans. That has slashed the supply of new debt.
Meanwhile, investors' dumping of existing tax-free bonds drove muni market yields to two-year highs in January.
But yields have come down from their highs and have stabilized in recent weeks. The annualized tax-free yield on the Bond Buyer newspaper's index of 40 long-term muni issues nationwide was 5.67% on Thursday, down from a peak of 5.95% in mid-January.
The lack of bond sales by California could mean that other issuers, such as local governments in the state, will have an easier time floating debt -- if they decide to brave what still are dicey muni market conditions.
Also, without new state bonds for sale, owners of previously issued bonds might find it easier to sell those securities at decent prices if investor demand picks up.
-- Tom Petruno
Photo: State Treasurer Bill Lockyer. Credit: Armando Arorizo / Bloomberg News