Californian cuts, bonds and votes | FT Alphaville

Californian cuts, bonds and votes

California is biding its time in the 2011 municipal bond market.

The LA Times’ Money & Company blog on Monday reported that the state is postponing general obligation bond sales due in the spring until fall 2011:

Under Brown’s budget plan the state would limit general obligation bond sales to $5.76 billion this calendar year, and sales wouldn’t occur before fall.

Lockyer spokesman Tom Dresslar said the state’s cost of servicing its outstanding general obligation debt is expected to total $4.93 billion in fiscal 2011-12, up slightly from $4.89 billion in the current fiscal year but an estimated $248 million less than if the state added to its debt load via bond sales this spring.

Quick reminder about GO bonds, courtesy of Bond Girl’s comprehensive post — these are bonds backed by the full faith and credit of the issuer, which commits to raise the necessary revenues to cover the obligation. The other main type of muni-bond is a revenue bond, which is secured by a defined revenue stream, for example a utility or a construction project.

California is kicking the can down the road in hope expectation that demand will return following the glut of issuance in the final months of 2010 that coincided with the expiration of the Build America Bonds programme. This will be the first time since at least 1988 that California, the biggest issuer of US municipal debt, has not sold GO bonds in the spring, according to the FT.

This GO sale will also come up after a planned referendum on temporary tax increases — the linchpin of Governor Jerry Brown’s budget plan announced on Monday. A bold move, considering historical Californian obduracy to tax cuts, particularly amongst state Republicans.

The budget itself is a brutal package which augurs ill for other states in tricky spots, such as Illinois and, now, Texas. Some example cuts:

– $1.5bn from welfare

– $1.7bn from Medi-Cal

– $500m each from the UC and CSU systems

– $750m from services for the developmentally disabled

– And $200m from the state bureaucracy.

But not surprising given its $25bn budget deficit — according to PMO capital partners’ analysis California ranks 48th out of 50 states in an index of financial health. (Illinois and Arizona bring up the rear.)

Interestingly, the Brown plan also contains proposals to shift responsibility for the running and funding of more services to local governments. We’re not well versed in Brownian political philosophy so can’t comment on whether this chimes with his previous stint as Governor. Nevertheless, it’s possible that the shifting of responsibilities to increasingly micro levels is an emerging legacy of the crisis, as states seek to clear their books.

Last week, as FT Alphaville noted, Ben Bernanke implied the Fed had neither the authority nor the need to bail out state and local governments.

Not everyone is worried by this phlegmatic approach. Especially in the Commonwealth of Virginia, where they appear more concerned about being rescued from rather than by the Fed. As posted by Zero Hedge:

RESOLVED by the House of Delegates, the Senate concurring, That a joint subcommittee be appointed to study whether the Commonwealth should adopt a currency to serve as an alternative to the currency distributed by the Federal Reserve System in the event of a major breakdown of the Federal Reserve System.

Well, Virginia has to do something with all those cigarettes that no-one will be smoking anymore.

Related links:
California faces budget cuts of $12bn – FT
A two-tiered municipal bond market? – FT Alphaville
Default and bankruptcy in the municipal bond market (part one) – Bond Girl
US municipal bonds – Lex
US states of emergency – FT