California's plan to raise $2 billion in General Obligation bonds has been temporarily shelved as a result of ongoing legislative hurdles.
The bond sale was scheduled to begin next week and price on March 4, but state Treasurer Bill Lockyer postponed the deal for a week. He said the delay was required because the state legislature hadn't voted on a cash-management bill that would make California debt more appealing to investors and ratings firms.
California has the lowest credit ratings of any state. Moody's Investors Service rates the state's general-obligation bonds Baa1, Standard & Poor's ranks them A-minus and Fitch Ratings rates them BBB.
But John Flahive, director of fixed income at BNY Mellon Wealth Management, said that because of the delay and the size of the deal, the bonds may come around 20 basis points over where existing debt trades, which means the yields would be in the range of 5.875% to 6%.
Meanwhile, Governor Schwarzenegger continues to search for ways to close the budget gap which is projected to be $20 billion.
In low-key votes, lawmakers slashed nearly $1 billion from the state’s prison system, chiefly from inmates’ medical care and approved a $540 million reduction in state workers’ paychecks. The state Senate had approved those measures last week and on Monday they passed the Assembly on party-line votes.
Any tax increases remain "off the table". A spokesperson for Schwarzenegger said the Governor “would veto any plan that includes suspending a tax break.”
Especially hard-hit thus far has been the California State educational system. The Cal State University system, that great bridge between working-class California and its middle class, is under threat. Tuition has been going up at a head-spinning rate -- 32% this year! Faculty is being cut, financial aid is disappearing and many key classes are impossible to get.
If that weren't enough, the 2008 collapse of Lehman Brothers has hit some communities especially hard.
San Mateo, a scenic swath of peninsula between the Pacific Ocean and San Francisco Bay, saw $155 million evaporate when Lehman Brothers went bankrupt in September. On top of deep budget cuts brought on by California's fiscal crisis, the loss on Lehman securities means San Mateo's 735,000 residents are taking a hit.
Public schools here have laid off dozens of teachers and delayed or canceled renovations. Local community colleges are slashing classes and scrapping new facilities, even as enrollment surges because of the bad economy. The county trimmed its commuter rail service and shelved plans to build a new women's jail to alleviate overcrowding.
The biggest factor behind San Mateo's trouble is California's spending cuts. But its Lehman losses have made a bad situation worse.
San Mateo County's loss was the biggest of any municipality. Under state rules, the county government, city governments and area school districts hold their operating funds, reserves and bond proceeds together in an investment pool that lost about 6% of its value when Lehman went under.
The investment pool owned highly rated Lehman bonds and notes, which currently trade around 20 cents on the dollar. Any recovery from the bankruptcy process will take at least another year. A recovery of 20 cents on the dollar would leave the pool with a loss of roughly $125 million.
By far the biggest hindrance toward a solution is the stalement between Governor Schwarzenegger, who adamantly opposes tax increases and the Democratic-controlled legislature, which is equally adamant in its opposition to further spending cuts. It appears that this stalement will keep California "on the brink" until the very critical 2010 election tips the scales either more toward Republicans or Democrats.
As the world's ninth largest economy, California's fortunes are critical to the United States and the entire world. Sadly, the crisis threatens to get worse unless unemployment should miraculously diminish or an economic recovery gains momentum. Readers of "Marko's Take" know that neither of these outcomes is likely in the near future. Thus, California's prospects are likely to reach a crisis level by the end of the year.
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