State Sells $1 Billion in Bonds

Borrowing costs have fallen sharply for Uncle Sam in recent months, but not for California.

The state, facing its biggest budget gap in a decade and a stalemate over reimbursement for power costs, sold $1 billion in general obligation bonds Tuesday. Yields were down modestly compared with a state bond offering in June, but compared with top-rated borrowers, California’s cost to borrow was the highest in six years.

A group of investment banks led by Lehman Bros. submitted the winning bid on the sale, originally planned for Sept. 11. The banks bought the bonds with the intent of selling them to other investors.

The tax-exempt bonds, proceeds from which will help expand schools and parks, were issued in a number of maturities. On the 10-year bonds the annualized yield was 4.12%; on the 30-year issue the yield was 5.2%.

The yields were about 0.20 point above what top-rated muni bond issuers are paying to borrow. California is rated A-plus by Standard & Poor’s Corp., or two notches below the highest S&P; rating of AAA.

Some bond investors said they weren’t interested in the California deal because they thought the state should pay even higher rates.

Since June, “the economic situation nationally and in California clearly has deteriorated,” said Mike Pietronico, head of municipal trading at Offitbank in New York, which manages about $3.5 billion of tax-exempt bonds. “It doesn’t look like you’re paid to take that risk” at the deal’s prices, he said.

Still, the California tax-free yields compare favorably with what investors can earn on taxable bonds. A 5.2% tax-exempt yield is equivalent to a 9.49% taxable bond yield for a California resident in the top state and federal tax brackets, according to Bloomberg data.

Some investors have shied away from California debt in recent months as the budget outlook has worsened. Gov. Gray Davis says the state may need to close a budget gap of as much as $14 billion, in part because of a drop in tax collections tied to the stock market’s slump. Meanwhile, a bond offering that would cover the billions of dollars the state incurred in power costs over the last year has repeatedly been delayed.

Concerned about the budget and the power bonds, Moody’s Investors Service has warned it may downgrade California for the second time this year, from the current Aa3 rating.