Tag Archives: Bonds

Sometimes there is something to the market

Investors snap up California debt on first day of issuance

by Brian Leubitz

Sometimes you can learn something from a market, or maybe the credit rating agencies can learn something from a market.  Specifically, we’ve been downgraded to just over junk status, yet we have state constitutional rules that prioritize debt service over everything but K12 education. In other words, even if we didn’t raise revenue in any way, we would be legally required to cut, cut, cut our way into paying back bond investors.

And perhaps investors understand something that the credit rating agencies aren’t acknowledging, as they gobbled up California debt quickly yesterday as  Lockyer’s office offered some short-term debt to cover some gaps.

Yield-hungry individual investors on Tuesday put in orders to buy more than half of the short-term notes that California is selling this week to raise cash.

Brokerages handling the deal for state Treasurer Bill Lockyer said they had orders for $3.05 billion of the notes, or 56.5% of the planned $5.4-billion deal, by late afternoon.

The brokerages will continue to take orders from individual investors on Wednesday. Institutional investors will bid for what’s left on Thursday, which is when final interest rates will be set.

The state is preliminarily estimating that the nine-month notes will pay an annualized tax-free yield of between 0.40% and 0.55%. Because that interest is exempt from state and federal income taxes it’s equivalent to a higher taxable yield, depending on an investor’s tax bracket. (LA Times)

We’re still slightly higher than Texas, but hardly a “failed state.”  You want to see failed state? Greece is paying 111.7% for its 1-year  debt, and well, at this point you have to assume the interest pressures are close to breaking the EU. Investors are fairly well convinced there will be a Greek debt default.  

Now, I’ll not get too into the weeds here, as there is a lot to digest here. But, I will add the disclaimer that these bonds were actually given the credit rating agencies’ highest rating. Apparently they are high on our short term debt.  But from a macro perspective, Lockyer, in general, hasn’t had a huge problem selling our debt.  Perhaps the market is saying something…

UCS says NO on 16

The Union of Concerned Scientists has officially come out AGAINST Proposition 16.

The two-thirds vote requirement sets a problematic precedent for a community’s desire to raise and spend funds for an approved purpose.  For the specific purposes outlined in the ballot initiative, the two-thirds vote requirement would effectively prevent local communities from having a choice as to who they purchase their electricity from.  Today, this choice, or the threat of such a choice, could have a positive impact on the behavior of the regulated investor-owned utilities (IOUs) in a number of areas, including rates and increasing investments in local sources of renewable energy.  

The environmental community in California has said that we need to move away from the 2/3 vote toward a simple majority vote on state budget and related revenue matters.  This proposed constitutional amendment goes in the opposite direction.  

Local governments rightfully fear that if this initiative passes, opponents with the sufficient financial resources to mount a public campaign will try to restrict local government’s ability to issue other types of revenue bonds.  

While publicly owned municipal utilities (POUs) can’t guarantee more or less renewable energy than the IOUs, most California POUs have a voluntary green power option that ratepayers can opt into to promote additional development of renewables.  The California IOUs currently do not have such an option and don’t appear to be moving any time soon in that direction.  

While the initiative exempts the 2/3 vote requirement for bonds that would go to 100 percent renewable power, it would still require a 2/3 vote for any combination of renewable and non-renewable energy-even if a newly proposed community choice entity committed to a portfolio of, for example, three-quarters renewables.  

The recent desire and community support for creating new Community Choice Aggregation (CCA) entities for retail electricity purposes, along with the periodic attempt by some communities (e.g. Yolo County) to expand existing POUs, has led PG&E to put this proposition on the ballot to thwart, once and for all, the ability of communities to move toward a limited or full-blown public power option.  

It is relevant to note that all the local jurisdictions that have been promoting the CCA or public power expansion have made renewable energy a top priority in their plans to take over part of the electricity service in their communities.  Not surprisingly, the jurisdictions that are most interested in the public power option, each have relatively progressive elected leaders who have publicly indicated strong commitments to increasing renewable energy.  

Of course, these commitments don’t guarantee that more renewable energy will be produced or used, but we do like to encourage every utility to increase their percentage of renewables as much as possible, and these local elected leaders have expressed a strong desire to create portfolios of energy that have a higher percentage of renewables than the IOUs would be required to procure.  Showing encouragement to elected leaders at all levels of government to promote more renewables can be a positive strategy.  

Please vote NO on 16.

Lockyer: Default ‘balderdash’

Treasurer Bill Lockyer has been going all around the nation to sell California debt. And suffice it to say he was not one bit pleased with the so-called prediction of debt default.

The state Treasurer’s Office came down hard this afternoon on a prediction from California Lutheran University economists that the state could default on some of its debt, calling the warning “balderdash” that is “nothing more than irresponsible fear-mongering with no basis in reality, only roots in ignorance.” (SacBee)

I guess he’s a bit shy today.

Bad: Bonds Sold at 4%, Worse: We Just Put $11 Billion More on the Ballot

In a rather disheartening statement about the status of California’s debt, the state was forced to pay a shockingly high 4% (tax-free) for about $1.9 Billion in bonds sold this week:

Borrowing $1.9 billion on Tuesday via bonds that mature in June 2013, the state was forced to pay a 4% annualized tax-free yield to lure investors. As recently as Friday the brokerages underwriting the deal, led by Goldman Sachs, had estimated that the bonds could be sold at a yield of 3%.

The boost in the yield demanded by investors reflects the “saturation” of the market with California debt over the last seven weeks, said George Strickland, a bond fund manager at Thornburg Investment Management in Santa Fe, N.M. Since Sept. 23 the state has sold more than $21 billion in short- and long-term debt for budget-related reasons and to fund infrastructure projects. (LA Times 11/11/09)

Unfortunately, with the state looking at about $14 Billion of budget deficits over this fiscal year and the next, there’s no indication that we will be able to take it easy on the borrowing.  And this bond itself is to repay $2 Billion that the state took from local governments to cover the gaps they opened up in the budget “solutions.”

Furthermore, with the signing of the water package, the state is looking at taking another $11 Billion of general fund bond indebtedness.  Treasurer Lockyer points out that with these bonds, our debt service as a percentage of budget looks like a rather ugly figure, possibly rising as high as 10%.  If we continue to heap on debt, basic services will continue to suffer.

But the decision on water still must pass a vote, and the decisions that face the voters of California are some very difficult ones. The question of whether the winners in this deal, primarily the wealthy farmowners of the Western Central Valley, are able to keep the anti-debt forces at bay is still an open question.  Or as Peter Schrag puts it in the California Progress Report:  

Water is a fixed – and probably declining – resource. The only way it can be stretched is by conservation, recycling of waste water and by more efficient use. This deal takes the first baby steps in that direction, but only by promising more goodies to agriculture and by taking most of the money to pay for it not from the beneficiaries but from schools, universities, the old and the sick, and from the taxpayers, present and future. Next November, when they get to vote on the bonds, they’ll have the last word on that.

I’ll Be Baaacck: Deficit Edition

Know how we’ve kind of moved on from the myriad budget crises? Well, it’s not moved on, and it’s out for blood…

Gov. Arnold Schwarzenegger estimated Monday that California’s budget will fall out of balance by $5 billion to $7 billion this fiscal year, on top of a $7.4 billion gap already projected for 2010-11.

If true, state leaders would confront at least a $12.4 billion to $14.4 billion problem when Schwarzenegger releases his budget in January. California currently has an $84.6 billion general fund budget. (SacBee 11/10/09)

Seeing as nothing has changed on the Republican side on taxes, and bonds are not all that likely either, this will likely mean more cuts. So, who will it be this time? Total elimination of IHSS? Cutting money for firefighting services?

Round and round the legislators minds go, where they will stop nobody knows.  But certainly everybody will be trying to lay low as the axe comes calling.

It shouldn’t be this way.

Lockyer Pleads for a Deal

Treasurer Bill Lockeyer issued a written statement today, and you can practically hear the tone in his voice: (h/t John Myers)

“With every passing day, the State’s credit rating moves closer and closer to the junk pile. If the Governor and Legislature dump us on that pile, they will end indefinitely the State’s financial ability to build schools, highways, levees — all the critical public works we need to rebuild California. If our credit rating sinks to junk status, the State will find the door to the infrastructure bond market locked shut.

“If we’re denied the ability to sell bonds, financing for infrastructure projects will cease. It won’t slow. It will stop. Many thousands of California workers will lose their jobs. Thousands of businesses will lose billions of dollars in revenue. At the precise moment our best economic recovery effort is most needed, we will fail.

Now, you would think this is an equal castigation of all parties. And I think that is the spirit in which it was intended. However, Lockyer did dip into Arnold’s bag of tricks on the question of dealing with non-budgeting issues.

I ask them to stop devoting energy to any issue that does not directly relate to closing this year’s budget gap without adding to out-year liabilities. Give Californians and the world a pleasant surprise, for once: Balance the budget now, and get back to the work of getting our state back to work.

Note to Lockyer: there are 120 legislators. About 10-20% of those legislators are tied up full-time with budget stuff. There are other serious issues that need to be dealt with, ignoring them doesn’t make them any less real.

Will California Be The Next Argentina?

In some respects the battle over the May 19 propositions is overblown. It’s important to kill the spending cap in Prop 1A, and Props 1C-1E represent some dangerous one-time budget solutions that will probably cause more problems than they solve.

But none of these propositions will change the fact that on May 20, California will again be facing a multibillion dollar budget shortfall. And in turn that raises the specter of default. California cannot go “bankrupt”, but we can find ourselves without enough money to pay those we owe. The state flirted with that possibility in February, and although John Chiang is confident that we will have enough money to last through the summer, the ongoing collapse of the global economy and its kneecapping of our state’s revenue have already caused our bond ratings to sink to the lowest in the nation.

We’re only able to keep the lights on through continued borrowing, and that has been helped by federal hints and proposals to guarantee some or all of our debt. But that may not be enough to resolve growing concerns among bond buyers about California debt, and as a result a high-stakes standoff appears to be developing, as Felix Salmon explains:

The more interesting response was, basically, “my moral hazard trumps your moral hazard”. In other words, it’s true that because California has insured itself against default, there’s moral hazard there: whenever anybody is insured against anything, the likelihood of that thing happening goes up. But at the same time, there’s a bigger moral hazard at play: the federal government will never let California default, it’s too big to fail. And so when push comes to shove, California will get a federal bailout before it defaults on its bondholders.

I suspect, however, that the moral hazard seniority works the other way around: the fact that California’s bondholders are insured means that it’s not too big to fail, and that in fact a payment default by the state would have very little in the way of in-state systemic consequences. (I have no idea what it might do to the monolines, but if they can’t cope with a single credit defaulting, they really shouldn’t be in the business they’re in.) The federal government might step in to mediate the negotiations between the monolines and the state, but it’s not even obvious why it would want to do that.

The basic issue here is what exactly would happen if California defaulted – who blinks first, who has to accept getting less than they are owed. As I see it the possible outcomes look like this, in order of increasing regressivity:

  1. Federal government steps in to provide operating capital to California in order to both pay what the bondholders are owed and prevent the state from having to make crippling cuts. This is essentially what has been done with the big banks, and a solid argument could be made for doing it with CA – if we have to close schools or hospitals, the economic downturn WILL become a Depression.
  2. Federal government makes the bondholders whole but demands California implement crippling budget cuts in order to repay the feds for the cost of helping insure the bondholders. This could be ameliorated with some form of cramming down the bondholders, but folks like you and I would get crammed down even more.
  3. The feds take the Gerald Ford route and tell California “drop dead” – CA under law cannot fail to pay the bondholders, so we’re on our own. We could try and negotiate with them, or pay outright. This basically turns California into a Latin American IMF client, having to cramdown working people so the bondholders get paid.

It’s worth noting just how important that last point is. As David Harvey explained in A Brief History of Neoliberalism, the 1975 New York City default was a major turning point in economic history. Ford’s Nixonian advisers argued that NYC shouldn’t be bailed out in order to hit liberals and unions. As a result NYC had to negotiate with the bondholders and was forced to make massive spending cuts, reversing 40 years of policy of increasing services to help working people in the city.

Once the NYC strategy was rolled out and shown to be a success, it became the seed of the IMF’s “Washington Consensus” moves in the 1980s and 1990s to impose right-wing economics on nations that needed their aid. NYC was thus one of the earliest victims of the shock doctrine – California may well be next.

Someone is going to have to pay more to solve this mess. The question before Californians is whether the low- and middle-income will be the ones to pay, as we have been in the recent budget deals, as we have been in Asia and Africa and Latin America – or whether the federal government will do the right thing and protect our public services and those who depend on them.

Which is why the Zombie Death Cult is so insistent on forcing the state to go over a cliff. They’re salivating at the chance to shock doctrine this state, always have been.

It’s All About Prop 1C Now

As we enter the final weeks before the May 19 special election, the often blurry picture of the six initiatives and the broader politics surrounding them is coming into focus. Yesterday’s rejection of Propositions 1A, 1D and 1E by the California Democratic Party convention should not be surprising for two reasons:

  1. Despite the rhetoric, none of these propositions will have a meaningful impact on the immediate budget mess. Prop 1A of course has no effect at all on revenues until 2011. Props 1D and 1E are drops in the bucket, especially considering that at minimum there is an $8 billion budget hole no matter what happens on May 19
  2. Those three propositions were the most objectionable and obviously ridiculous proposals of the six. A spending cap is a huge price to pay, and Prop 1A doesn’t really offer much in return. As several folks eloquently explained on the convention floor, including Paul Hogarth, Props 1D and 1E are an indefensible attack on the most vulnerable and needy Californians. Democrats showed that they still had souls by rejecting those two measures.

With the likely rejection by voters of Prop 1A, Prop 1B is rendered moot even if it is approved (CTA looks like it will lose its multi-billion dollar gamble) and the irrelevancy of Abel Maldonado’s Prop 1F, that leaves Proposition 1C as the only thing about the May 19 election that has any suspense left to it. The February budget deal assumed $5 billion would be brought in from Prop 1C – which is optimistic at best but does mean that of all six propositions, only Prop 1C really matters over the near term.

Along with the rest of the Calitics Editorial Board I oppose Prop 1C – it’s a payday loan that is likely to leave the state on the hook for at least $2 billion out of the general fund when it becomes clear that people aren’t about to reverse the trend of buying fewer lottery tickets.

But if I can offer some free advice to the Democratic legislative leadership, they need to stop digging their hole any deeper, stop pushing for Prop 1A and start focusing solely on Prop 1C.

It’s possible that the legislative leadership could convince Californians that throwing shrinking lottery revenues to a bond market that hasn’t shown much interest in the proposal is something we have to do to prevent even worse cuts than those that are already likely to come down in June.

It would certainly help their cause if they stopped speaking as if those cuts were inevitable. Democratic legislators have tired to scare Democratic voters into backing the propositions and it hasn’t worked for Prop 1A in particular – all that fear does is reinforce the base’s anger at what appears to be capitulation to Republicans.

By now it has to be clear that the Democratic legislative leadership has badly miscalculated on these proposals. Aside from the flawed nature of the proposals and how they came onto the ballot, selling them as a single package was a disastrous move. If they want to salvage anything from this sinking ship, they could tell Californians why we should take a chance on borrowing against the lottery via Prop 1C, and how it will help our Democratic leaders more strongly resist Republican demands for massive cuts, instead of assume those cuts are a foregone conclusions. They could embrace demands for a majority vote budget, instead of dismissing it out of hand.

I still wouldn’t vote for Prop 1C. But if they want other Democrats, progressives, and the people of California to vote for it, following something like the above plan would assure those voters that the legislative leadership is willing to be realistic, and that they actually do have some sort of May 20 strategy that they can plug Prop 1C into. In the absence of such a strategy, Prop 1C is going down, and the leadership has nobody to blame but themselves.

All Sorts of Credit Ratings News

All right. I know you all couldn’t get enough of my bond news, so I’m back with a related topic: credit ratings agencies.  We’ve mentioned the crashing of our credit ratings, but some states aren’t taking it lying down.  Of course, California is leading the charge.  The Pew Center on the State’s Stateline.org takes a look:

Four days after one of the agencies, Fitch Ratings, downgraded California’s bond rating to the worst in the country based on the state’s struggling economy, California put together what state officials said was one of the largest long-term general obligation bond sales in U.S. history. The money will be spent on infrastructure projects.

State Treasurer Bill Lockyer said the sale, which exceeded the original goal of $4 billion, proved that the ratings the agencies assign to state bonds are dubious, because as far as the municipal bond buyers were concerned, “investors stepped up and showed their confidence in California.”

Lockyer and other state treasurers say these same agencies gave top ratings to AIG and Lehman Brothers, private companies whose problems helped cause the Wall Street collapse last fall. The state officials say the ratings firms should give states higher credit scores that are more comparable to those assigned to corporations. (Stateline.org 3/31/09)

This of course is Lockyer’s job.  It is his job to stand up to the ratings agencies and try to prod our rating higher. Even a minor rating change is worth millions, if not billions, to our general fund.  And Lockyer has been making this argument for a while now.  And Lockyer isn’t the only one, with state officials all over looking into the issue, such as Conn. AG Richard Blumenthal. So, best of luck to them.  

That being said, if one were to really crack into the mythical reasonable investor’s mind, would they really be saying that they are showing confidence in California? Or is it that they simply don’t believe the federal government will allow us to fail.

The ratings agencies have the teevee and the intertubes just like we do. They know exactly what is going on.  They see the struggles that we have just in getting the most simple tax increase passed. They see the terrible polling numbers for the special election. They wonder how we are going to pay our bills without Prop 1C’s expected “payday loan.” (Skelton’s words, not my own.)

Now, Lockyer does have a point that if the mortgage backed securities that brought down our economy were given AAA ratings, it makes no sense to give our bonds an “A” rating. But one has to think that given all the scrutiny, the ratings agencies are being extra cautious.

The final point that should be made is that the credit ratings system is most certainly broken. The agencies are paid by the companies issuing the debt, it really is a ludicrous arrangement.

All Sorts of Bond News

Who’s getting excited? I know everybody is just thrilled to hear some deats of our latest bond sale, so I won’t disappoint. Bear with me, there will be some nerdy details up ahead. I’m expecting hundreds of comments on this post, because I know how this stuff really brings in the crowds.

Let’s start with some of the sales that we will see shortly from Treasurer Bill Lockyer. After our successful sale of the last batch of bonds, we’re moving forward on selling a bunch of taxable bonds.  There are a bunch of reasons for pursuing taxable bonds, despite the fact that investors prefer the tax-free bonds.  First, some projects can’t be funded with tax-free bonds. Tax-free bonds generally require that they are spent on infrastructure.  These are some of the initiatives we’ve passed over the last few years, like the stem cell initiative.

But a bigger reason for this is the stimulus.  One of the ways the feds chose to help the states was through the “Build America Bonds” program, which subsidizes the sale of bonds.  This could be some big money.

The rest of the deal will finance traditional infrastructure projects that usually are funded with tax-free bonds. Lockyer will use taxable bonds instead because the U.S. Treasury will pick up part of the interest cost of the securities.

Under the Build America Bonds program, states and other municipal issuers can choose to sell taxable bonds for public-works projects and have the federal government pick up 35% of the annual interest expense on the securities.

That could be a great deal for California — depending on what it has to pay on taxable bonds. (LAT blogs 4/6/09)

The Times’ Tom Petruno then goes on to estimate how much California will have to pay by looking at some other recent bond sales. In the end, he comes up with a couple of numbers showing the amount the state would pay to be about a half of a point lower than if we sold tax-free bonds.  So, yay, marginally cheaper money!

And then we have the question of how that money is being and will be spent.  Many projects were halted last December when the administration and the controller estimated that we weren’t going to be able to pay our bills.  Many of those projects have yet to be restarted, and may not be anytime in the near future.

Thousands of infrastructure projects across California that have been on hold since December will not be funded in the coming months, state finance officials said Monday, while hundreds of others will restart as a result of the state’s recent bond sale.

*  *  *

While the state’s Pooled Money Investment Board, which manages cash flow and lends money for infrastructure projects, declined to spend any money to restart projects, some work is moving forward.

The board decided to disburse the remainder of $650 million approved in January for infrastructure projects along with another $500 million as a result of the bond sale’s success: The state sold $6.5 billion in bonds, well more than its goal of $4 billion. (SF Chron 4/7/09)

A bunch of other projects were never halted, mostly because they were either too important or too expensive to stop.  As to when the remaining projects get restarted, well, I guess that will be determined by the future bond sales as well as the next round of budget fights.