Today, state treasurer Bill Lockyer will begin offering $4 billion worth of California general obligation bonds for purchase by California citizens. On Wednesday the bond sale will open for institutional investors. If successful, the bonds will initially back a $500 million payment for infrastructure improvements. The bond sale could give an early indication on how some of the budget reform measures, including one on the May Special Election ballot, are being considered by both investors and California taxpayers.

The bonds are being offered at a time when the Wall Street ratings agencies are taking a sour look at California’s fiscal health. Last week, the Fitch Ratings service downgraded California’s general obligation bond rating from A+ to A, which now ranks the lowest of all 50 states. Standard and Poors Rating Services had knocked down the state’s bond rating to A in February.

The treasurer’s office rebuked the action by Fitch declaring that the state has never defaulted on its bonds and no investors have been denied what was owed to them.
But the ratings agencies are concerned. If the budget deal is defeated, California will face a much larger budget deficit with apparently little consensus on how to deal with it.

While Fitch executives acknowledged that the state took a positive step in passing the budget deal, they are keeping a wary eye on California because the economy continues to sink and because of the Special Election’s uncertain outcome. A lower bond rating means the state likely will have to pay higher interest rates to lure investors.

Under the shadow of low bond ratings, will investors step up?

One consideration for California taxpayers is that the tax-exempt bonds may be an attractive place to turn as income tax rates go up because of the budget deal. For some, the bonds may be a place to store their money and escape some of the higher taxes before the temporary tax increase expires.

But more telling for the budget deal and May ballot measures that were a result of the deal, is whether the institutional investors want to take a gamble on California securities.

Part of closing the hole in the current budget is Proposition 1C, a measure designed to securitize future lottery proceeds for a lump sum paid to the state now. Will Wall Street investors be willing to fund the lottery plan? Do you they have faith in California to solve it’s fiscal problems? The new bond sale may give us a clue.

Those interested in purchasing California bonds can learn more here.