Courtesy of Bloomberg
California Under Schwarzenegger Underperforms Davis (Update2)
By Michael B. Marois
June 30 (Bloomberg) -- It costs California taxpayers more to borrow now than under former Governor Gray Davis, the man Arnold Schwarzenegger helped oust and succeeded in an unprecedented recall fueled by the state's sagging finances.
As the most populous U.S. state, with a gross domestic product that's No. 8 in the world, California is so strapped for cash that it must consider a short-term, $10 billion loan to cover its bills. The widening deficit means the financing may be about 0.85 percentage point more expensive than five years ago, when Davis lost his job over a budget gap twice as large as the $17 billion deficit the state now faces. That's an added $8.5 million on every $1 billion borrowed.
While banks also are charging as much as four times more for lines of credit to back the debt, the state's plight can't all be blamed on Schwarzenegger any more than he could blame Davis five years ago.
``We confront a more volatile mix of fiscal, political and market challenges than we faced in 2003,'' California Treasurer Bill Lockyer, a Democrat, said in an e-mailed response to questions. ``The new ingredient is turmoil in capital and credit markets. And every additional dollar we shell out to Wall Street is a dollar we can't spend on educating our kids, providing health care for our families and keeping our communities clean and safe.''
Housing Slump
California, more than any other state, is reeling from the worst housing market in a generation just as it was hit hardest by the Internet stock bust seven years ago. The state also is a victim of a national economy that shows few signs of rebounding. Faster inflation, a falling dollar and a growing budget gap are causing investors to demand higher yields on everything from U.S. bonds to Pfizer Inc.'s AAA corporate debt.
Average yields on top-rated state and local government bonds due in 30 years touched 5.08 percent last week, the highest since June 2004 and up from the low this year of 4.19 percent on Jan. 23, according to Concord, Massachusetts-based research firm Municipal Market Advisors.
Spending by states on schools, roads and other public programs may rise by the smallest amount since 2003 in the next budget year as the slowing economy curbs tax collections, the National Association of State Budget Officers and the National Governors Association said in a report released June 19. The projected 1 percent increase compares with the 5.1 percent jump this fiscal year.
`Farther and Faster'
``The housing market has come down farther and faster in most states than anyone predicted and that's led to larger revenue shortfalls than anyone was predicting,'' said Emily Raimes, an assistant vice president with Moody's Investors Service in New York.
Sales of previously owned homes in the U.S. fell to an annual rate of 4.89 million in April, the lowest in at least nine years, according to the National Association of Realtors in Washington. The Commerce Department said June 26 that the economy grew at a 1 percent annual pace in the first quarter, capping the weakest six-month expansion in five years.
The Federal Reserve is signaling that it may need to raise its target rate for overnight loans between banks this year even as the economy slows because inflation is accelerating. Policy makers on June 25 kept the benchmark federal funds rate at 2 percent, ending the most aggressive easing of monetary policy in two decades, and said in a statement that ``the upside risks to inflation and inflation expectations have increased.''
Budget Deficits
At the same time inflation is quickening, the Treasury and local governments are stepping up borrowing amid expanding budget deficits. The U.S. government's shortfall for May totaled $165.9 billion, more than in all of fiscal 2007.
California, as the biggest borrower in the $2.66 trillion municipal market, bears the brunt of investor discord.
The state sold $1.5 billion of bonds last week, paying 5.3 percent on the portion due in 30 years, up from 4.78 percent on similar securities issued a year ago, according to data compiled by Bloomberg. Investors demand 23 basis points more in yield to own 30-year California general obligation bonds instead of top- rated debt than they did a year ago, Municipal Market Advisors says. A basis point is 0.01 percentage point.
``There are some concerns on their budget, like a lot of municipalities right now,'' said Eric Boeckmann, a money manager at Chicago-based Northern Trust Co.
Different Market
While long-term debt costs are on the rise under Schwarzenegger, they're still less than they were under Davis, when investors demanded an average 44 basis points more yield than top-rated municipal debt to buy the state's 30-year bonds, according to Bloomberg and Municipal Market Advisors. That's cold comfort to Schwarzenegger as he faces higher costs to access money short term.
``There's no question that we're working in a totally different capital market,'' said H.D. Palmer, Schwarzenegger's finance spokesman.
California's planned sale of $10 billion in revenue anticipation notes, used by governments to cover expenses until tax receipts arrive later in the year, would be the state's largest short-term loan since its borrowing in 2003. Yields on top-rated one-year municipal notes have climbed 85 basis points to 1.69 percent since June 2003, according to a Bond Buyer index.
Under Davis
Back then, Davis was removed from office following an unprecedented recall campaign. The state in 2002 had suffered its worst one-year decline in tax revenue since World War II as the economy slowed and the Standard & Poor's 500 Index tumbled 23 percent.
It didn't help Davis that voters were still blaming him for the state's 2000 and 2001 energy crisis, in which Enron Corp. and other energy traders were accused of gaming the state's partially deregulated grid by withholding power to create artificial shortages. That led to seven days of rolling blackouts and left taxpayers with $43 billion of long-term contracts to buy electricity at above-market prices.
Under Schwarzenegger, a 60-year-old Republican, California began 2007 without a budget deficit for the first time in six years. By the end of the year, he was forced to declare a fiscal emergency.
The state borrowed $7 billion through short-term notes last October. Three months later Schwarzenegger ordered mid-year budget cuts and $3.2 billion of further borrowing to plug a gap that swelled to $14 billion in one year.
California may need letters of credit or other backing for its short-term loans from banks just as lenders are raising their fees and pulling back on their lending.
No Bargains
The average cost of a backstop such as a standby purchase agreement or letter of credit is 1 percentage point of the amount of bonds being sold, said Matt Fabian, an analyst at Municipal Market Advisors. That's up from about a quarter- percentage point a year ago.
``I don't think anyone is real optimistic that we are going to get a great bargain out there,'' said Paul Rosenstiel, the head of California's public finance division.
California lawmakers say they likely won't reach agreement on a new budget before the start of the fiscal year tomorrow. They remain deadlocked over whether to raise taxes or cut spending to eliminate the deficit.
If a budget is passed by the end of July, the state would sell the short-term notes around the beginning of September. A prolonged stalemate, like the one last year that lasted until the third week of August, would force California to sell revenue anticipation warrants, a more expensive type of short-term loan that can be repaid over two years.
``The credit access now is the big question mark,'' said California Controller John Chiang, a Democrat.
To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net
Last Updated: June 30, 2008 11:23 EDT>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
Source: http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=afzm9oISTASQ
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