Tuesday, 6 October 2009

California Bonds

As the largest state in the U.S. with above average income, California should be able to borrow money at lower costs than smaller, poorer states. Instead, California has the lowest bond rating in the U.S. and is paying a premium on our debt. It’s inexcusable.

For example, something simple like the recent revenue anticipation notes with maturities next spring are costing CA up to a 1.5% annual interest rate. That may sound cheap, but 6 month U.S. Treasuries are curriently yielding 0.1-0.2% and other states are doing similar borrowing at rates well below 1%. CA is paying similar premiums on long-run debt, and the state’s long-run fiscal issues are just as bad as the short-run.

The cost is hundreds of millions of dollars in unnecessary interest payments. I would advise the state not to consider any additional bonds until our bond ratings and interest rates are in line with other states.

This report from Treasurer Bill Lockyer on debt affordability is worth reading.

This year’s report concludes the fiscal earthquake that struck California in 2008 and 2009 will cause debt service to consume a larger piece of the State’s General Fund The portion will grow from the current 6.7 percent to 10 percent or more by the middle of the next decade … The current debate about how to finance improvements to California’s water infrastructure system provides a timely and pressing case study Some have suggested paying the entire cost with State general obligation bonds, which must be repaid from the General Fund But this report makes clear that further increasing the General Fund’s debt burden, especially in the next three difficult budgets, would require cutting even deeper into crucial services already reeling from billions of dollars in reductions. The case for user funding for most water system improvements is compelling, both as a matter of equity and fiscal prudence.

About the Author

Ethan Jacob

Author & Editor

I am Ethan Jacob Executive Director of the Center for Business and Policy Research at the University of the Pacific, where I have a joint faculty appointment in the Eberhardt School of Business and the Public Policy Program in the McGeorge School of Law..

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