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State Has Room to Borrow, Wall St. Asserts

Big investors and debt rating firms aren't troubled by the governor's bond plans.

January 07, 2006|Tom Petruno | Times Staff Writer

California probably wouldn't have much trouble enticing investors to buy the tens of billions of dollars in bonds that Gov. Arnold Schwarzenegger is proposing to help fund public works spending -- at least as long as the state economy is growing and the annual budget gets balanced, financial analysts say.

Big investors and Wall Street debt rating firms on Friday generally were untroubled by the program unveiled in the governor's State of the State speech to the Legislature on Thursday.

In fact, officials at the rating firms applauded the concept of a formal plan that would set priorities for capital spending.

"The idea of long-term comprehensive capital planning is a good thing," said Tim Blake, who tracks California municipal debt for rating firm Moody's Investors Service in New York.

Schwarzenegger proposed raising $68 billion via bond offerings over the next decade or so as part of a $222-billion plan to build roads, levees, schools, courthouses and other facilities.

If the program can get past political hurdles and if voters approve the bonds, the support of investors will be crucial: If they are unwilling to fund the debt -- or unwilling to fund it at interest rates that the state can afford -- the plan could collapse.

Although the state would be trying to borrow significantly more via bonds each year than it ever has, its current debt load is considered moderate by bond rating firms. That leaves room for more IOUs, analysts said.

"There's no question that they could have more debt," said Steven Zimmermann, an analyst at rating firm Standard & Poor's.

The state's outstanding general obligation bond debt -- those issues supported by general fund tax revenue -- totaled $48 billion on Dec. 1, according to state Treasurer Phil Angelides' office. That included $10.4 billion of economic recovery bonds sold in 2004 to cover years of budget deficits.

Debt rating firms gauge the burden of a state's debt using measures such as debt per person and the amount of debt as a percentage of personal income in the state. By such measures, California ranks below other populous states such as New York and Massachusetts.

California's debt per capita was $1,545 in 2004, compared with $2,901 for New Jersey and $2,019 for Illinois, Moody's said.

California's low debt rating, which is tied with Louisiana's as the worst of all 50 states, isn't related to its debt load but rather to the state's perennial struggle to balance its budget, Zimmermann said. If the state can keep its budget on track, rising debt won't be an impediment to a higher bond rating, he said.

Although Schwarzenegger's program would sharply raise the state's debt bill over time, a key assumption is that the debt load would rise in tandem with a growing population and tax revenue, so the debt wouldn't become onerous.

What's more, Schwarzenegger proposed that the state be barred from issuing bonds if doing so would make its annual debt repayment costs exceed 6% of general fund revenue. That would put a cap on bond issuance if revenue faltered. (The state's yearly debt-service bill now comes to about 4.8% of general fund revenue, excluding the economic recovery bonds, Zimmermann said.)

Even if the state has no trouble selling more bonds, there is a risk that it could "crowd out" other public borrowers in California, such as cities and school districts. But because of the state's 9.3% top personal income tax rate, there has long been a huge number of California investors hungry for the tax-exempt interest that muni bonds pay.

"There always seems to be demand," said David Moore, director of municipal bond research at American Century Investments in Mountain View, Calif.

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