California, Illinois Debt Sales At a Standstill

Wednesday, July 15, 2009 3:23 PM

NEW YORK -- California and Illinois are halting debt sales until they approve new budgets, but some state agencies are forging ahead with debt sales that do not rely on general tax revenue.

California has both the biggest deficit at $26 billion and the most pent-up demand for the new cash it can raise by issuing debt, as evidenced by its having to resort to IOUs.

Moody's Investors Service and Fitch Ratings have responded to the political paralysis by slicing California's ratings to close to junk, at Baa1 and BBB.

The state will find it difficult to sell general obligation debt or the short-term tax and revenue anticipation notes it badly needs until Republican Governor Arnold Schwarzenegger and Democratic legislators resolve a squabble over cuts and higher taxes.

California Treasurer Bill Lockyer has estimated the state needs to sell $7 billion to $12 billion of short-term notes. His spokesman on Wednesday could not immediately say whether this forecast had grown.

"I don't think they are legally able to sell them," said Emily Raimes, analyst at Moody's. "They believe at this time that the market wouldn't be there if they tried to sell them, because the budget gap is so large."

But that is not the case for some California agency bonds, which are backed by payments that are separate from the state's credit. The ability of a state entity to issue revenue bonds helps it carry on with important services and avoid delaying capital projects.

In contrast, general obligations carry a state's full faith and credit, and investors often considered them safer.

At least one California arm went ahead on July 9 with a bond sale: a $200 million revenue bond issue by the California Infrastructure and Economic Development Bank, which served as a conduit issuer for a nonprofit entity.

As a Pennsylvania budget official noted, its state constitution requires it to repay debt.

Muni fund managers said many state constitutions have similar clauses, which ease bondholders' concerns though they noted the states must fully explain their budget problems in marketing and sales materials. That can be a difficult task when budget talks are fluid.

Phil Culpepper, Illinois' debt management director by email cited another hazard budget-lacking states face.

"As the governor has stated, the state needs to have a budget in place before we issue any debt due to the possible negative action by the rating agencies that would increase our borrowing costs," he said.

Illinois, which also began its fiscal 2010 on July 1 without a budget, has nearly $8 billion of new bonding authority for capital projects and cash-flow needs.

The risk that the market will extract too steep a discount when a state issues debt before it enacts a budget can incline states to delay bond offerings, fund managers agreed.

But Connecticut, whose budget has been delayed as Republican Governor Jodi Rell and Democratic legislatures fight over new taxes, spending cuts and asset sales, drew strong retail demand for its July 9 offering of nearly $116 million of state revolving fund revenue refunding bonds, a source familiar with the offering said.

That issue had an uncommon advantage -- it was rated AAA.

Connecticut has no plans to sell general obligation debt until this autumn. While the lack of a budget led it to delay the approval of new bonds, the state still has a pipeline of previously authorized debt and a Rell spokesman said he knew of no projects that had been delayed.

North Carolina is another example of a state with an authority that has gone ahead with revenue bonds as its governor and legislature weigh new taxes to help close a budget deficit. Its turnpike authority on Tuesday issued nearly $353 million of debt.

http://moneynews.newsmax.com/financenew ... 35980.html