Thread: Investors loan California $5 billion to fund budget

Investors loan state $5 billion to fund budget

Matthew Yi, Chronicle Sacramento Bureau

Friday, October 17, 2008
(10-17) 04:00 PDT Sacramento --

California's effort this week to raise billions of dollars by obtaining loans ended Thursday with better-than-expected results, with the Golden State selling $5 billion worth of short-term notes to investors.

While the state needs to borrow a total of $7 billion for the fiscal year that ends June 30, California officials decided initially to try borrowing $4 billion this week given the recent Wall Street meltdown and worldwide credit crunch.

But the sale of the so-called revenue anticipation notes, or RANs, was stronger than expected with individual investors, who had first dibs Tuesday and Wednesday, buying nearly $4 billion worth of the short-term notes.

Institutional investors such as large banks had their turn Thursday and purchased about $1 billion worth of RANs.

"The success of this deal far surpassed all expectations," Treasurer Bill Lockyer said in a written statement. "Californians stepped up and invested in record numbers, showing their faith in the state's strong credit."

Short-term borrowing is typical for many states, which uses the funds to smooth out cash flows throughout the year. But the economic turmoil fueled by troubles on Wall Street and the resulting credit freeze had created concern that California would not be able to find lenders.

An immediate cash infusion to the state's coffers is especially vital this year due to the state's continuing economic woes and budgetary problems. State Controller John Chiang warned earlier this month that California could run out of cash by the end of October.

California's successful borrowing is good news for the credit markets, said Ross DeVol, director of regional economics at Milken Institute, a nonprofit economic think tank in Santa Monica.

"It gives some indication that the credit markets, while certainly not completely defrosted, aren't as frozen as we thought," he said.

DeVol said that because of the recent free fall of the stock markets, investors are looking for conservative and safe investment options such as the state's RANs.

H.D. Palmer, a spokesman for the state Department of Finance, agreed.

"In this environment of uncertainty, investors are clearly looking at the state of California like it's the Rock of Gibraltar," he said.

There were two types of RANs sold: one that matures on May 20, 2009, and another that matures on June 22, 2009, with interest rates at 3.75 percent and 4.25 percent respectively. Like most government bonds, the notes are tax-exempt.

Palmer said the $5 billion raised this week should help the state pay its bills at least through February.

While obtaining the loans is good news for California, it certainly doesn't mean the state has shed its continuing fiscal challenges and the seemingly inescapable budget deficit.

Last week, the Department of Finance estimated the state's revenues for the current fiscal year could come up short by $3 billion.

"Unfortunately the reality is that (with the sale of the RANs) we've avoided the worst case scenario, which is not being able to pay our bills," DeVol said. "And the bad news is that we'll probably need to float more debt because of the current state of the economy. Corporate taxes will be down, retail sales tax will be down, and property tax collection will be down."

Lawmakers and state officials say the state's finance staffers are in the midst of trying to get a better handle on the potential size of the budget deficit.

"The trick is determining exactly what the magnitude of the problem is and addressing it with a single set of actions," said Assemblyman Roger Niello, R-Fair Oaks (Sacramento County), vice chairman of the Assembly Budget committee. "And in order to do that, we need to wait a little bit ... but then we also have to move as quickly as possible."

E-mail Matthew Yi at myi@sfchronicle.com.

http://www.sfgate.com/cgi-bin/article.c ... 13ITCP.DTL

The success of this deal far surpassed all expectations," Treasurer Bill Lockyer said in a written statement. "Californians stepped up and [b]invested in record numbers, showing their faith in the state's strong credit."





And what will these Californians.....presumably American citizens.....receive as a return on their investment?

A state legislature not working in the best interests of Mexico and an end to handouts to illegals and their children would be a nice place to start, I think.