State's bonds becoming less popular investments

Days after lawmakers agreed to ask voters for $11.1 billion in debt for water projects, the state had to pay more than expected to sell its most recent bond issue.

Brokers underwriting the sale of $1.9 billion in state general obligation bonds originally thought investors would demand a 3 percent yield. Instead, as the Los Angeles Times reported Wednesday, "the state was forced to offer a 4 percent annualized tax-free yield to lure investors." That means the state will pay millions more in interest than estimated. Those millions will go more to debt service and less to schools, health care, prisons and other priorities.

Myriad factors influence individual bond sales. But at least one bond manager said the higher cost in the state's latest sale was related to the "saturation of the market" by California. Over the last seven weeks, California has sold more than $21 billion in debt. Currently the state has more than $130 billion of outstanding bond debt. A little more than half, $66.4 billion, has been sold to investors. The state will pay $5.75 billion to service that debt this fiscal year, or 6.7 percent of general fund revenues. The state treasurer's office projects that those debt payments could more than double by 2018, or more than 10 percent of revenues. That's a disturbing number.

In the 1980s, debt service consumed less than 2 percent of state general fund revenues. According to the Legislative Analyst's Office, debt service has become "one of the fastest growing items in the state's strained general fund budget." The state's growing debt load and its inability to cut spending or raise taxes explains why California has the lowest credit rating of all 50 states. If voters see water borrowing as a necessary investment, lawmakers may have to consider rationing future state bond sales. Borrowing for high-speed rail and children's hospitals might have to be held back in favor of bond sales for other priorities.