Strongest California Economy Drives University BondMichael B. Marois
The University of California plans its biggest tax-free borrowing since 2006 as the 238,000-student system benefits from the state economy’s record strength and a rally in education debt that’s outpacing the municipal market.
The offer totals $2.6 billion when including taxable and variable-rate debt. It comes the week before former Homeland Security Secretary Janet Napolitano takes over as president of the 10-campus system with an operating budget of $24 billion. Governor Jerry Brown, a UC Berkeley graduate, pushed lawmakers to boost funding 5 percent, after five years of deficits.
“It looks like we have stable and predictable funding from the state, and that isn’t something we’ve had in a couple of decades,” Nathan Brostrom, executive vice president of business operations, told the board of regents last week.
Muni yields are at a two-month low following the Federal Reserve’s decision to hold off on curbing its monthly bond purchases, and education debt has fared even better. Its 2.2 percent gain for the past month compares with 1.9 percent for all city and state bonds, Standard & Poor’s data show.
The extra yield buyers demand on some University of California obligations is the slimmest since April, benefiting from an improving fiscal outlook for the most-populous U.S. state.
The system joins issuers such as Denver and Western Michigan University refinancing higher-cost debt this week. The university projects the move will save about $80 million for each of the next 10 years. State Treasurer Bill Lockyer’s office is handling the sale.
The offer includes $1.3 billion of tax-exempt bonds, the most from the system in a long-term, fixed-rate issue since one of similar size in 2006, data compiled by Bloomberg show.
The university issued bonds in February, including tax-free debt maturing in May 2025 that traded this month with a yield spread of 0.43 percentage point more than top-rated bonds, data compiled by Bloomberg show. It was the smallest gap since April for trades of at least $1 million.
In the 2006 offer, 12-year debt that had bond insurance priced to yield 3.86 percent, or about even with yields on benchmark debt, data compiled by Bloomberg show.
The school “is a well-known, big issuer and people are comfortable with it,” said Dan Solender, director of munis at Lord Abbett & Co. in Jersey City, New Jersey, which oversees $16.5 billion of local debt.
Moody’s Investors Service rates the tax-exempt bonds Aa1, second-highest, with a negative outlook. Annual expense growth has outpaced revenue, producing five consecutive annual operating deficits, the company said.
The regents have raised tuition 84 percent since 2007 to make up for declining state appropriations. The system declared in 2011 that it could no longer guarantee admission to the top 12.5 percent of the state’s high-school seniors.
Brown, 75, persuaded voters last year to pass the highest statewide sales tax in the U.S., at 7.5 percent, and to boost levies on annual income of $250,000 or more to avert cuts to schools. He promised to freeze in-state tuition in the UC and California State University systems this year.
The state budget for the year that began July 1 provides a 5 percent funding increase to the University of California and $125 million for a tuition freeze. The budget projects funding will rise 5 percent next year and 4 percent in each of the two following years.
Brown’s income-tax increase helped boost California’s credit rating and demand for its tax-exempt bonds.
Fitch Ratings raised California’s grade to A, sixth highest, last month after lawmakers passed a $96.3 billion budget in June that incorporated the Democratic governor’s more conservative revenue forecasts and set aside a $1.1 billion reserve. Standard & Poor’s raised it to the same level in January, the first boost since 2006. Moody’s grades the state A1, four steps below the top. It hasn’t been higher since 2001.
“The credit of the state is improving, taxes are up at the state level, and all that brings in more demand that helps,” Solender said.
A Federal Reserve Bank of Philadelphia index tracking California’s economy, equivalent to the world’s ninth-largest, is the highest since at least 1979.
In addition to 10 campuses, the University of California operates five medical schools and medical centers and four law schools. The university is also involved in running nuclear-weapons laboratories and other research facilities for the U.S. Energy Department.
Localities nationwide are issuing $3.5 billion of long-term munis this week, down from $4.2 billion last week, data compiled by Bloomberg show. They’re selling as AAA 10-year munis yield 2.82 percent, the lowest since July 23. That compares with 2.7 percent on Treasuries with a similar maturity.
The ratio of the yields suggests munis are relatively cheap, as local bonds historically yield less than their federal counterparts given their tax-exemption. Following is a pending sale:
Connecticut plans to sell $575 million in general-obligation debt this week to finance a general-fund deficit that arose as the state changed procedures to conform with generally accepted accounting principles starting in July. The debt matures from October 2015 to October 2027. Fitch grades the state’s general-obligation securities AA, its third-highest level, while Moody’s gives it a fourth-best Aa3. Ramirez & Co. is managing the negotiated deal.