Alert December 21, 2009

California Issues More Debt; Lockyer Reiterates Warning

Since September 2009, California has sold more than $21 billion in municipal debt in an effort to shore up its budget deficit and pay for voter-approved capital improvements.  Some analysts worry that this flood of debt might stall the bond market’s recovery by boosting yields too rapidly.  For instance, in September 2009, California paid a 2.48% yield for a 3-year note issue, while in early December, an issue with the same maturity cost the State 4%.  Although investors may enjoy the higher yields, demand for the recent California issue has slowed, indicating that the bull is not quite out of the pen.

California Treasurer Bill Lockyer recently appeared before the California Assembly Budget Committee and reiterated his warning that the State’s debt burden and debt service obligations are rising too rapidly.  According to Lockyer, California has sold approximately $36.6 billion of bonded debt so far this year, including nearly $20 billion in long-term debt.  Moreover, the State’s debt service payments have increased 143% since 1999, while its revenues have increased only by 22% during the same period.  Lockyer underlined the Catch-22:  budget pressures require debt issuance, but more debt equals higher debt service, which puts additional pressure on the State’s budget.  Issuing more debt also drives up the yield cost, which puts even more pressure on the budget.  The answer, according to Lockyer, is an “old-fashioned balanced budget,” which would require, among other things, limiting and prioritizing infrastructure spending and debt programs.