California issued $2.6 billion in bonds to finance capital improvements and refund previously issued securities.
The state sold the bonds in two series, with about $1.3 billion dedicated to each of those purposes. The capital improvement bonds mature between 2025 and 2053, yielding between 2.65% and 3.85%. The refunding bonds mature between 2024 and 2043, yielding between 2.65% and 3.8%. The securities received a rating of Aa2 from Moody’s Investors Service, AA from Fitch Ratings, and AA- from S&P Global Ratings.
The rating “incorporates the state’s large and diverse economy, which supports strong, albeit cyclical, revenue growth prospects, a solid ability to manage expenses through the economic cycle and a moderately low level of long-term liabilities,” Fitch analysts wrote.
The issuance marked the second-largest municipal debt sale of the year. It comes amid a multibillion dollar budgetary shortfall that has Fitch analysts worried about California’s resilience to future economic downturns. The state is currently facing a $73 billion deficit, according to the state’s nonpartisan Legislative Analyst’s Office. (Governor Gavin Newsom says the budget deficit is $38 billion.)
California revenues can be volatile because they depend heavily on capital gains tax collections from the state’s wealthy population. California’s budget expects capital gains realizations to account for 8.4% of general fund tax revenue in fiscal year 2022-23, compared to 12.8% the year prior, according to the official statement accompanying the sale of the bonds.
The capital improvement bonds will fund school construction, flood prevention efforts, highway safety projects, and other initiatives.
The bonds are general obligations of the state, backed by its full faith and credit.
J.P. Morgan Securities LLC and Wells Fargo Bank, NA, served as lead underwriters on the issuance, purchasing the bonds for $2.9 billion. The price reflected a premium of $322 million. Public Resources Advisory Group acted as municipal advisor.