California Can’t Wait for Facebook to Boost Coffers: Muni Credit

Facebook CEO Mark Zuckerberg
Mark Zuckerberg, chief executive officer and founder of Facebook Inc., speaks at Facebook's F8 developers conference in San Francisco. Photographer: David Paul Morris/Bloomberg

The biggest initial public offering by an Internet company can’t come soon enough for California Governor Jerry Brown, whose budget deficit is getting worse.

Facebook Inc., the Menlo Park, California-based owner of the world’s most popular social-networking service, expects to begin marketing its IPO next week. When company insiders such as Chief Executive Officer Mark Zuckerberg exercise options, the state stands to rake in about $2 billion from income taxes through next fiscal year, the Legislature’s nonpartisan budget analyst has said.

Brown, a 74-year-old Democrat, hasn’t said how he’ll use the cash. In two weeks, he plans to revise his $92.6 billion budget for the year starting July 1. The spending imbalance was already at $9.2 billion before tax revenue fell about $3 billion below his projections. He’s asking voters to approve higher taxes or face $4.8 billion in education cuts.

“There’s no question that a Facebook IPO will benefit the state’s bottom line, but it shouldn’t be viewed as a get-out-of-tough-decisions-free card,” H.D. Palmer, a Brown budget spokesman, said in an interview.

California lawmakers have chopped more than $45 billion since 2008 from programs such as health and schools as the most-populous U.S. state grappled with shortfalls totaling more than $100 billion. The 18-month recession that ended in 2009 cost the state more than a million jobs and lowered revenue by 24 percent from peak to trough.

$96 Billion

Facebook, founded in 2004, is valuing itself at as much as $96 billion in the offering, according to a regulatory filing. The company had about 3,500 employees as of March 31.

The IPO differs from those of other California-based Internet companies. The way the lockup periods determining when workers can exercise options are structured, California’s slice may come within six months, said Jason Sisney, a deputy legislative analyst in Sacramento. When Google Inc., based in Mountain View, went public in 2004 it took two years for the bulk of the revenue to reach state coffers.

If the IPO comes this month and options are exercised in November, taxes would apply to the year starting July 1, Sisney said in an e-mail.

“It’s a windfall, that’s it,” Bud Byrnes, president of RH Investment Corp. in Encino, a part of Los Angeles, said in an interview. “The issue that is going to be crucial is going to be what happens on the tax increase plan.”

Zuckerberg’s Share

Executives and investors will sell 157.4 million shares for as much as $35 each, according to a regulatory filing.

Zuckerberg, 27, a California resident, could pay as much as $390 million in taxes to the state from exercising an option, according to data compiled by Brown’s Finance Department and Bloomberg. Employees and some investors holding 139 million shares exercisable in six months could pay about $353 million.

A Facebook spokesman, Jonathan Thaw, said the company didn’t have a comment.

California, the world’s ninth-biggest economy, took in $7.2 billion from income taxes in April, $1.9 billion less than Brown’s forecast.

The worsening finances may threaten California’s chance for an upgrade by Standard & Poor’s. In February the company boosted its outlook to positive from stable on California’s A- rating, the lowest for any state. The larger deficit is among issues that will “test the Legislature’s commitment to a stronger fiscal position as a public policy priority,” Gabriel Petek, an S&P analyst in San Francisco, said in a report this week.

‘Budget Gimmick’

“I wouldn’t want it to be the latest budget gimmick,” state Treasurer Bill Lockyer said of the IPO tax revenue, in a telephone interview. “And if you build it into ongoing expenditures, that’s even worse as it either exacerbates or just postpones the day of reckoning.”

Investors starved for California bonds haven’t been deterred by its fiscal strains. Debt of California and its localities earned 13.9 percent in the year through May 2, beating the 12 percent return for the full municipal market, according to S&P data.

When the state sold $1.35 billion of tax-free general-obligation bonds April 12, it priced debt maturing in 10 years to yield 2.87 percent, or 0.73 percentage point higher than a Bloomberg Fair Value index of top-rated municipal securities. The spread over AAA hadn’t been that small since 2008, according to data compiled by Bloomberg.

Following are pending sales:

WASHINGTON plans to sell $432 million of federal highway grant anticipation revenue bonds, or Garvee bonds, as soon as this month, according to data compiled by Bloomberg. It will be the state’s first sale of such debt, according to Standard & Poor’s, which rates the bonds AA, third-highest. Citigroup Global Markets is the underwriter. (Added May 4)

CHICAGO plans to sell $435 million in revenue bonds this month to pay for improvements and extensions to its water system in the first debt issuance for the century-old structure since user rates doubled in November. The proceeds will also be used to refund debt, according to an offering document. Siebert Brandford Shank & Co. will lead the sale. (Updated May 4).

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