Nov. 6 (Bloomberg) -- A public agency in California, the U.S. state with the most municipal debt, and the wealthiest state, Connecticut, began taking orders today for $2.1 billion in bond sales to help with budget deficits.

The Statewide Communities Development Authority is selling $1.5 billion of debt to replace localities’ property tax revenue that California is borrowing to help fill this year’s gap. The 2013 notes may yield 3 percent, based on preliminary price discussions cited by Neil Klein, senior portfolio manager at New York-based Carret Asset Management, which oversees $1.6 billion.

Connecticut, the richest state by per-capita personal income, wants to raise $600 million to plug part of the deficit remaining from the year ended June 30. Estimated yields ranged from 1.2 percent on notes due in 2012 to 2.86 percent on those maturing in 2016, Klein said in an e-mail.

The states’ use of one-time budget fixes has been cited by rating companies as being harmful to their creditworthiness. Standard & Poor’s negative outlook on California in part reflects “nonrecurring fiscal adjustments.” Connecticut, which received a negative view from Moody’s Investors Service last month, got another one from Fitch Ratings yesterday.

Connecticut may avert a rating cut by making “progress in closing emerging gaps and addressing structural imbalances through recurring actions as well as minimizing reliance on planned borrowing for operations,” Douglas Offerman, a Fitch analyst in New York, said in a statement.

Operating vs. Capital Borrowing

Selling bonds to fill operating budget holes is less common in the municipal market than borrowing to finance schools, roads, sewers, hospitals and other capital improvements.

Negative outlooks imply the long-term possibility of lower credit ratings and higher borrowing costs. California’s general obligation pledge to repay debt is rated A by S&P, Baa1 by Moody’s and BBB by Fitch, the fifth-, third- and second-lowest investment grades, respectively. Connecticut carries AA ratings from Fitch and S&P and Aa3 from Moody’s.

Yields on AAA municipal bonds due in 5 years slid 3 basis points to 1.98 percent today, the lowest since Oct. 8, according to a daily survey by Municipal Market Advisors of Concord, Massachusetts. A basis point is 0.01 percentage point.

The California agency took orders for bonds that may yield 23 basis points more than a Bloomberg index designed to track fair values of similar debt. Banks led by Goldman Sachs Group Inc. are underwriting the deal.

Connecticut chose Citigroup Inc. to handle its sale of so- called economic recovery notes. The seven-year securities may pay 13 basis points more than the comparable Bloomberg Fair Value index. Klein said he is considering buying 2015 debt with an estimated 2.61 percent yield and 2016 bonds at 2.86 percent.

Concluding Next Week

Individual, or retail, investors were able to place orders for both deals today and will be able to do so again on Nov. 9. The sales conclude Nov. 10, when institutions can buy the debt, according to Web sites from each state’s treasurer.

U.S. bond markets will be closed Nov. 11 in observance of Veterans Day, based on recommendations from the Securities Industry and Financial Markets Association, a trade group.

This past week, municipal issuers led by California sold about $3.3 billion of Build America Bonds and other taxable notes as well as $6.6 billion of tax-exempt securities, according to preliminary data compiled by Bloomberg. The long- term, fixed-rate issuance total of almost $10 billion is down from $11.8 billion last week, the data show.

To contact the reporter on this story: Jeremy R. Cooke in New York at jcooke8@bloomberg.net.

Last Updated: November 6, 2009 16:23 EST