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California Note Sale May Top $10 Billion, Chiang Says

May 30 (Bloomberg) -- California, the most indebted state, may need to sell more than $10 billion in short-term securities in order to pay bills through the fiscal year that begins in July, Controller John Chiang said.

The size of the revenue-anticipation note sale may exceed previous estimates as tax collections have trailed projections and the state exhausted most of its internal borrowing ability, Chiang said in an interview yesterday in Bloomberg’s San Francisco office.

“It could be more,” said Chiang, a 49-year-old Democrat. “The question is whether there is market capacity.”

A $10 billion sale would be the largest since 2010. California lost more than 1 million jobs in the recession that started in 2007, reducing revenue by 24 percent. This year, the largest state by population borrowed $5.4 billion in September and had to seek another $1 billion in February after tax collections fell short and spending exceeded expectations.

State and local governments commonly sell short-term notes -- usually payable in one year -- to bolster cash flow until tax receipts increase later in the year. The amount of the issue in the coming fiscal year will be determined by cash-flow projections compiled by Chiang and Governor Jerry Brown’s budget office, and the final budget due July 1.

Brown, a Democrat, announced May 14 that California’s deficit had swollen to $15.7 billion from $9.2 billion in January, after income-tax collections came in 20 percent below what he had estimated in his spending plan.

The state’s chief financial officer, Chiang is also responsible for auditing state agencies, school districts and other elements of local government.

Audits Planned

Chiang, whose staff is investigating the financial practices of near-bankrupt Stockton, said his office’s planned audit of about 400 recently abolished redevelopment agencies in California will help identify other troubled municipalities.

“That is really going to unmask the financial wherewithal of a lot of these jurisdictions,” Chiang said. “Have they been spending properly? Have they been borrowing properly? If they have not, it’s going to expose quite a bit.”

The redevelopment agency audits are a requirement of the law the California Legislature approved last year to eliminate them. Audits of Hercules, a city of 24,000 in the San Francisco Bay Area, found “glaring holes” in accounting and management of state and federal funds, according to a May 10 news release.

“The staff at Hercules, finance staff, said their redevelopment agencies were operated horribly,” Chiang said yesterday. “But we already know Hercules is troubled. The question is: What’s happening with other jurisdictions?”

California Bankruptcies

California is home to two of the largest U.S. municipal bankruptcies: Orange County, which filed in 1994 after losing $1.7 billion on investments; and Vallejo, in 2008, after failing to win union concessions.

Chiang, who serves on the governing board of the California Public Employees’ Retirement System, the largest public pension in the U.S., said the fund is likely to lower its assumed rate of return again after dropping it to 7.5 percent in March from 7.75 percent.

The rate is used to calculate how much money the plan will need to cover promised benefits, and what employers must contribute. While the fund’s actuary recommended lowering the rate to 7.25 percent, the Calpers board resisted, saying it would burden local governments when they were already facing financial strains.

“I thing we are going to have to continue to drop the discount rate,” Chiang said. “The reality is that you drop it too quickly, you put a world of hurt on the state’s finances. You would have jurisdictions face even greater financial difficulties.”

To contact the reporter on this story: Michael B. Marois in Sacramento at

To contact the editor responsible for this story: Stephen Merelman at

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