Investors Like Brown Fiscal Gain Belying Doubled DefaultsJames Nash
California debt, which has outperformed the $3.7 trillion municipal market for the longest span in six years, is set for more gains after the state logged its first budget surplus in more than a decade.
Even with two cities in bankruptcy and Standard & Poor’s lowest credit rating among U.S. states, California is drawing investors after voters in November passed the first statewide tax increase since 2004, said Peter Hayes, who oversees $105 billion of munis at New York-based BlackRock Inc.
Securities of California issuers earned about 9 percent in 2012, compared with about 7 percent for all tax-exempts, S&P data show. It was the third straight year to beat the market, the longest streak since 2006. At the same time, the extra yield investors demand on 10-year debt of the state and its localities is close to a four-year low, data compiled by Bloomberg show.
“Our overall view on the state is positive, especially given the passage of the tax increases,” Hayes said in an e-mail. The added revenue “goes a long way to solving the structural budget deficit they have dealt with the last several years.”
$6 Billion Plug
Governor Jerry Brown’s proposed $97.6 billion general-fund budget for the fiscal year beginning July 1 uses about $6 billion in revenue from sales and income-tax increases, leaving the state with a projected $851 million surplus, he said this month. The world’s ninth-largest economy racked up $213 billion in combined deficits over the previous 12 years.
Fitch Ratings last month joined S&P in saying the 74-year-old Democrat’s tax plan may bolster the most-populous state’s credit. Both companies grade California A-, six levels below AAA. Excluding so-called recalibrations, neither has raised the state since 2006.
Home to Apple Inc. and Google Inc., California had three municipalities file for bankruptcy protection in 2012: Stockton, San Bernardino and Mammoth Lakes, which exited the process in November.
One of Brown’s budget-balancing measures was to take $1.7 billion from local redevelopment agencies in 2011 and close them last year. The move helped force San Bernardino into bankruptcy by sapping revenue, city Attorney James Penman said.
The loss of the funds also accounted for a doubling in the number of California issuers added last year to the default database of Municipal Market Advisors, said Matt Fabian, managing director of the Concord, Massachusetts-based research firm.
California accounted for 39 of 205 issuers added to the database, which includes payment and covenant defaults as well as issuers drawing on emergency support, according to a Jan. 7 report.
The trend in California defied a 15 percent drop nationally in 2012, as local finances recovered from the recession that ended in 2009, Fabian said in an interview. California’s numbers reflected the loss of redevelopment funding, the report said.
With tax-free yields falling to generational lows in 2012, investors seeking extra yield didn’t penalize California for the defaults and bankruptcies. Investors demand about 0.7 percentage point of extra yield on debt of California and its issuers, close to a four-year low set in November, data compiled by Bloomberg show.
The localities under stress are “on the margins of the market,” said Michael E. Johnson, managing partner in Solana Beach, California, at Gurtin Fixed Income Management LLC, which handles $4 billion of munis. “You had to be credit-distressed to begin with for the loss of redevelopment money to push you over the edge.”
Local governments shouldn’t have been using the money to subsidize their general budgets in the first place, said Tom Dresslar, spokesman for state Treasurer Bill Lockyer. Their strains shouldn’t diminish investor confidence when California sells general-obligation bonds in coming months, Dresslar said by telephone.
“At the state level, we expect enhanced standing in the market with spreads tightening,” Dresslar said.
The treasurer hasn’t determined the size of the next issue, he said. In September, California sold about $1.8 billion in tax-exempt debt, including 30-year maturities at an all-time low yield of 3.72 percent. The bonds priced at 0.82 percentage point above top-rated securities, data compiled by Bloomberg show.
In trading yesterday, munis rallied across most maturities, pushing yields on 10-year benchmarks to a one-month low of 1.69 percent, data compiled by Bloomberg show.
Following is a pending sale:
NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY plans to issue $2.2 billion of school construction bonds and notes as soon as next week, according to Moody’s Investors Service. Proceeds will go toward refunding debt, which will reduce variable-rate securities and terminate swap agreements. (Added Jan. 17)