California Boosts Size of Bond Deal

Despite its well-publicized budget woes, California on Wednesday was able to boost the size of a bond offering while trimming the interest rates it paid on some of the debt.

Analysts said the deal showed that many investors remained willing to extend long-term credit to the state, even though a budget deficit of at least $8 billion looms in 2004.

But California, with the lowest credit rating among the states, continues to pay far more to borrow than what more fiscally stable states are charged.

California sold $1.8 billion in general obligation bonds, up from a planned $1.5 billion, according to Treasurer Phil Angelides’ office. The proceeds will be used to fund a variety of projects statewide, including new school buildings, flood control improvements and repair of parks.

“There was enough investor interest, and rates were attractive enough, that we upsized the sale,” said Mitchel Benson, a spokesman for Angelides.

The bonds were sold in maturities ranging from five years to 30 years. The annualized tax-free yield on the 30-year issue was 5.375%, down from the 5.40% that had been projected early in the day by the Wall Street brokerages that handled the sale.

“The deal did very well,” said Steven Permut, a senior fund manager and municipal bond expert at American Century Investments in Mountain View, Calif. “I think it was a good value for the state.”

Still, California’s cost of borrowing is well above what other states pay. The 5.21% yield California paid on the 20-year bonds in Wednesday’s offering contrasted with 4.63% that Connecticut paid on 20-year bonds it sold the same day.

California’s bonds are rated BBB by credit grading firm Standard & Poor’s. Connecticut’s rating is AA. The last time California was rated AA by S&P; was in 2000.

Individual investors ordered about $365 million of the California bonds, or 20.3% of the total sale, on Monday and Tuesday, before the debt was offered to institutional investors.

By contrast, a state bond sale in June drew $314 million in orders from individual investors.

Because interest on California municipal bonds is exempt from both federal and state income tax, the true returns to investors can be far higher than the nominal yields on the bonds.

For example, an investor in a combined federal and state tax bracket of about 34% would have to buy a fully taxable bond yielding 7.89% to equal the 5.21% yield on the 20-year bonds sold Wednesday.

General obligation debt is backed by the state’s full faith and credit. With the latest deal, California has about $32 billion in such bonds outstanding.