California Plans $2.7 Billion Issue as Retiree Costs Slow

California is set to borrow $2.7 billion from the bond market after its credit rating was raised, as retiree health-care costs grew less than anticipated.

The most populous U.S. state will sell $2.2 billion of tax-exempt general-obligation bonds and $310 million in debt subject to federal taxes, Treasurer Bill Lockyer said yesterday.

California’s rating was raised for the first time since 2006 by Standard & Poor’s in January. S&P’s one-step boost to A, sixth-highest, from A- followed tax increases championed by Democratic Governor Jerry Brown and spending reductions that bolstered the state’s fiscal outlook.

In addition to the new issue, California will remarket $228 million of Build America Bonds March 13, according to Lockyer. The Build America Bond program gave states and cities a 35 percent federal subsidy on interest as part of an economic stimulus plan. California and its local governments sold more than $39 billion of the debt.

Controller John Chiang said yesterday that the amount California would owe to pay for health and dental care of retired state workers over the next 30 years rose $1.7 billion since June 2011 to $63.8 billion.

The liability increase was less than expected because retirees submitted fewer and less-expensive claims, and because the California Public Employees’ Retirement System, which manages health insurance for state workers, took steps to lower costs, Chiang said.

Pensions Pre-Funded

California’s employee pensions are pre-funded, allowing investment returns to reduce long-term liabilities. The state finances retiree health benefits as they come due. The pension plans could save $21.8 billion to $42 billion over 30 years if California began to put aside money in a trust for the future liability, Chiang said.

“The current pay-as-we-go model of funding retiree health benefits is short-sighted and a recipe for undermining the fiscal health of future generations,” Chiang said. “Today’s challenge won’t necessarily become tomorrow’s crisis if policymakers can muster the fiscal discipline to invest now so that we can pay tens of billions of dollars less later.”

The state will take orders for its new bond issue from individual investors March 12 and March 13. The taxable bonds will be priced March 13 and the tax-exempt debt will be priced March 14, said Tom Dresslar, a spokesman for the treasurer.

JPMorgan Securities and Goldman Sachs & Co. will lead the sale, Dresslar said in a statement.

California tax-exempt bonds due in September 2042 traded yesterday with an average yield of 3.3 percent, or about 0.3 percentage point above benchmark municipal debt, data compiled by Bloomberg show. That spread has narrowed by more than half since the bonds priced in September.

Before it's here, it's on the Bloomberg Terminal.