State Treasurer refinances state bond debt, saves taxpayers $270 million

The State of California has found a way to save $270 million — without budget cuts or raising taxes.

State Treasurer John Chiang recently announced that his office had completed the sale of $1.93 billion in general obligation bonds, which will deliver hundreds of millions of dollars of savings to taxpayers. Like homeowners refinancing their mortgage, the overwhelming majority of funds were used to refinance approximately $1.54 billion of existing debt.

“I am very pleased at the result of this sale, which will save taxpayers such a substantial sum over the remaining life of the refinanced debt,” Chiang said in a press release announcing the bond financing deal. “Recent credit upgrades have increased the market’s confidence in the state’s credit worthiness and individual and institutional investors alike continued to demonstrate faith in California.”

Market volatility affects savings

Recent volatility in the stock market, according to Chiang’s office, made the substantial bond savings harder to achieve.

“This is a particularly favorable result, given the tremendous volatility in global equity and debt markets over the past several weeks,” he said. “In the face of this volatility, which saw unusual swings in bond yields, the issue met with good success.”

Earlier this summer, the state treasurer’s office announced that the state had made its final interest payments on the economic recovery bonds approved by voters in 2004.

According to KQED, the state had been paying more than “$1 million a day, every day, for 11 straight years.” Proposition 57, which was drafted at the behest of then-Gov. Arnold Schwarzenegger, adopted $14 billion in borrowing – with roughly $5 billion paid in interest payments and fees.

California’s improved credit rating

Ratings by the independent agencies affect the interest rates paid by the state, and in turn, how much it costs taxpayers to service billions of dollars worth of bond debt. The state’s credit rating for general obligation bonds varies with each of the three major credit ratings agencies.

In July, Standard & Poor’s Ratings Services raised California’s grade for general obligation bonds from “A+” to the higher “AA-.” The upgrade was credited to the state’s swift action on the state budget. In late June, Brown signed a $115.4 billion spending plan less than a week after lawmakers approved an on-time budget.

S&P’s summer upgrade followed a February uptick from Fitch Ratings, which raised the State of California’s general obligation rating to “A+” from “A.” According to the State Treasurer’s office, Fitch welcomed the state’s “continued improvement in its fundamental fiscal position, institutionalized changes to its fiscal operations, and ongoing economic and revenue recovery” as motivation for its credit ratings upgrade.

Moody’s Investors Service, the final of the three major bond ratings agencies, classifies California with an “Aa3” rating. That rating has not changed since June 2014.

California’s Long-Term Debt Picture

As of August 2015, the state has roughly $155 billion in authorized bond debt. Of that amount, $77.4 billion in long term outstanding bond debt has already been issued.

However, the state’s total debt burden is much larger than its outstanding bond obligations. State officials peg the total state government debt at $263 billion, or 12 percent of the state’s $2.2 trillion gross domestic product. The much-maligned, debt-burdened nation of Greece, by comparison, had a debt to gross domestic product ratio of 177 percent – prior to this summer’s implementation of capital controls, according to the Wall Street Journal.

Although the state’s debt burden is nowhere close to Greece, some financial experts caution that deferred maintenance on infrastructure as well as unfunded health care and pension liabilities add to the state’s total debt – raising the debt ratio to 50 percent.

“Of course, the official numbers sit at the low end of the estimates,” argued the LA Times’ Jon Healey. “They leave out $66 billion in deferred maintenance on infrastructure, $31 billion worth of bonds that have been authorized but not yet issued and roughly $10 billion owed to the federal government for unemployment insurance benefits.”

“Even using these worst-case-scenario numbers, though, the state’s debt-to-GDP ratio is less than 50 percent, compared with 175 percent in Greece,” he wrote earlier this year.

The next state general obligation bond sale is expected to occur in October.