Intersections: A Monthly Go-To for Reliable Facts and Analysis About California's Debt, Investments and Economy
 

Vol. 1, No. 2, Published June 8, 2015

Latest News: Summary of Ratings, Borrowing Costs, Debt Issuance, Investments and Treasury Activities

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Of all states with general obligation bond ratings,California is at the low end of the rating range. For example, Figure 1 below shows the rating of the five most populous states in the nation. Not only does California have a rating lower than all of the top-five states except for Illinois, it is also in the category of having a “split-rating;” that is, California is rated as a “high grade” by one agency (Moody�s Investors Service), but as a “medium-grade” by two other agencies (Fitch and Standard & Poor's). Illinois is rated lower than California largely because of its struggles to address long-term pension liability issues.

Second only to the general level of interest rates, ratings are a major driver of a state or local government�s borrowing costs. As ratings drop, investors demand higher yields -- with the result being many years of increased borrowing costs for those issuers at lower rating levels.

Assignment of credit ratings is determined after thorough evaluations of the issuer�s local economy, financial results, and management�s handling of changing circumstances of the first two factors. The good news is that California has made great progress on all three fronts in recent years. The differential in borrowing costs is the way investors “measure” the risk that any of these factors will change in a manner adverse to the bondholder. And, this measurement typically grows larger as the time to maturity increases. That�s why attaining -- and keeping -- the highest rating level is critical to good stewardship of the public�s money.

A discussion later in this issue compares California�s yields to those of New York and Florida, issuers with ratings closest to those of California.

Figure 1: Ratings Comparison

How do California�s ratings compare to other large states, and why does it matter? California ratings: Moody�s Aa3, S&P A+, Fitch A+. Florida ratings: Moody�s Aa1, S&P AAA, Fitch AAA. Illinois ratings: Moody�s A3, S&P A-, Fitch A-. New York ratings: Moody�s Aa1, S&P AA+, Fitch AA+. Texas ratings: Moody�s Aaa, S&P AAA, Fitch AAA

California�s bond ratings remain lower than all but two rated states. Lower ratings provoke investors to demand higher yields, which translates into higher borrowing rates.

The State’s recent 20-year yield sits at 3.39 percent, higher than the 3.06 percent yield on a national index of AAA-rated bonds, a difference of 0.33 percent. (See Figure 2.) The absolute yield on each index is higher by 0.03 percent over last month’s data.

The difference between the two indices one year earlier was slightly wider: California�s yield was 3.46 percent, while that same national index was at 3.05 percent, a difference of 0.41 percent.

The good news is that current yields demanded by investors in California bonds are lower than they were a year ago, which means that the State�s borrowing costs are also lower.

California�s lower borrowing costs over the past year are due, in part, to its improved financial condition. Standard & Poor�s Rating Services recently announced that California�s A+ rating had been placed on its CreditWatch list with �positive� implications. This is often indicative of a rating movement within a short period. Moreover, interest rates remain near historical lows.

Figure 2: Borrowing Costs

What does it cost for California to borrow? As of May 22, 2015, the representative investment yield for 20-year, AAA-rated general obligation bonds was 3.1 percent, according to a major national market index. The representative investment yield for 20-year, California general obligation bonds was 3.4 percent. As a result, for every $1 billion in bonds issued, California will pay $29.1 million more in debt service over a 20-year period. As of May, 22, 2014, the representative investment yield for 20-year, California general obligation bonds was 3.5 percent.

What does California�s higher yield mean for taxpayers who pay the freight on those increased yields?

In general, for every $1 billion in bonds issued, the State will have to offer higher yields than those paid by other populous states with higher ratings

Consider the case of a hypothetical issue of bonds for the states of Florida and New York, each of which is rated higher than California, but still not at the AAA level. Because of their higher ratings, these states enjoy lower borrowing costs than California, as shown in Figure 3.

For example, on a borrowing of $1 billion, California would pay an average of $1.4 million per year more than an issuer rated at the AAA level over a 30-year period. Compare that figure to the additional cost paid by Florida, which is less than half that difference at only $700,000 annually; and, it’s almost three times as much as the additional cost incurred by New York at $556,000 per annum. The numbers mount up. On a typical 30-year borrowing for essential infrastructure that amounts to a “cost” to California of $43 million.

Figure 3: Comparing California's Borrowing Costs to Florida and New York

Because of their higher ratings, Florida and New York enjoy lower borrowing costs than California.

When it comes to understanding yields and borrowing costs, it helps to look at recent trends.

Figure 4, below, shows the one-year trend in another widely used index, the Bond Buyer 20-Bond Index, over the past year. The shaded area shows the trend of rates. Four recent California offerings are highlighted to display those borrowing points for reference.

Figure 4: One-Year Trend of Interest Rates, Recent California Borrowings Shown

Falling interest rates help California borrow at a lower cost. This figure shows the one-year trend in a widely used index, the Bond Buyer 20-Bond Index, over the past year.

Source: Bond Buyer 20-Bond Index from Federal Reserve Bank of St. Louis

Note: California�s September and March sales were negotiated, while the November and April sales were competitive.

Interest rates on state and local government bonds are lower than they were a decade ago. Figure 5 also shows the trend of the Bond Buyer 20-Bond Index, but over a longer 10-year period.

Figure 5: 10-Year Trend of Interest Rates on State and Local Government Bonds

This figure uses the Bond Buyer 20-Bond Index over a 10-year period. Spikes and dips occurred along the way. The most notable spike occurred during the Great Recession. Note that yields are lower today than they were in 2005.

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Debt issuance was $22.7 billion from January through April 2015.

Debt Issuance

California State and local governments issued a total of $22.7 billion in debt during the first four months of 2015, a 39.2 percent increase from the same period in 2014, when $16.3 billion in debt was issued, according to data received by the California Debt and Investment Advisory Commission (CDIAC) as of May 22.1 (See Figure 6.)

This sharp increase was driven by continued refinancing activity. However, issues raising new money are also on the rise. It is possible this represents increased confidence by state and local governments that the U.S. economy is recovering. In addition, growing fears of a change in interest rates by the Federal Reserve may be provoking more issuers to accelerate their offerings before the rate change occurs.

A total of $5.6 billion in State and local debt issuance was reported for April 2015, a 17.8 percent increase from April 2014 ($4.8 billion). (See Figure 7.) This increase did not come without some market tribulation. Flows into and out of mutual funds have been mostly negative � meaning that these large investors have had less money to invest. The result of this is an increase in interest rates over the month.

Of the $5.6 billion issued, $3.0 billion was issued by the State and its agencies or related entities, while $2.6 billion was issued by local entities. (See Figure 8.)

A total of $1.8 billion in taxpayer money was saved from six refinancings orchestrated by Treasurer Chiang from February through May.

So far in 2015, the Treasurer has carried out six different refinancings that will together save taxpayers more than $1.8 billion over the life of the bonds.

For the period from April 16 through May 15, a total of $6.8 billion in debt final sale reports were received by CDIAC. (See Figure 9.) These are the top five areas of volume within the reported final debt sales:

  • K-12 School Facility: $2.0 billion
  • Power Generation/Transmission: $1.3 billion
  • Water Supply, Storage, Distribution: $644 million
  • College, University Facility: $624 million
  • Multiple Capital Improvements, Public Works: $347 million

Borrowing for school facilities remains the largest category. The power generation and transmission category is dominated by a major offering of debt securities for the California Department of Water Resources.

1 Issuers have 21 days from sale of the debt to report issuances. Since some data is reported late, the Treasurer's Office regularly updates monthly totals as more information becomes available.

Figure 6: Cumulative California Public Debt Issuance (In Billions)

California State and local governments issued a total of $22.7 billion in debt during the first four months of 2015, a 39.2 percent increase from the same period in 2014, when $16.3 billion in debt was issued, according to data received by the California Debt and Investment Advisory Commission (CDIAC) as of May 22.

Source: California Debt and Investment Advisory Commission

Figure 7: California Public Debt Issuance, April (In Millions)

A total of $5.6 billion in state and local debt issuance was reported for April 2015, a 17.8 percent increase from April 2014 ($4.8 billion).

Source: California Debt and Investment Advisory Commission

Figure 8: State* Vs. Local Debt Issuance, April (In Millions)

Of the $5.6 billion in State and local debt issued, $3.0 billion was issued by the State and its agencies or related entities, while $2.6 billion was issued by local entities.

* State issuers include the State of California, its agencies, commissions, authorities, departments and The Student Loan Corporation.

Source: California Debt and Investment Advisory Commission

Figure 9: Total Reports of Final Sale Received

4/16/2015 Through 5/15/2015, By Purpose (In Millions)

For the period from April 16 through May 15, a total of $6.8 billion in debt final sale reports were received by the California Debt and Investment Advisory Commission. K-12 school facilities led the way with $2.0 billion.

Source: California Debt and Investment Advisory Commission

Read more about debt issued so far this year. See the calendar.

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Investments

The Pooled Money Investment Account balance was $67.9 billion as of April 30.

The Treasurer's Investments Division manages and invests the State's excess or idle cash through the Pooled Money Investment Account (PMIA).

This is a commingled pool with three primary sources of funds: the State�s general fund, special funds held by State agencies, and money deposited by cities, counties and special districts in the Local Agency Investment Fund (LAIF).

As of April 30, the PMIA balance was $67.9 billion, with an average effective yield of 0.283 percent and an average life of 220 days. (See Figure 10.) The average daily PMIA balance was $61.7 billion as of April 30.

The Treasurer�s Office anticipates that the investment returns for the PMIA will continue to follow the market as shown in Figure 11.

Because these funds may be required on very short notice, the investment objectives for the Pooled Money Investment Account are safety, liquidity and yield, in that order of importance.

The year-to-date earnings rate for the PMIA is 0.263 percent, which reflects the prudent investing of a short-term portfolio in this unprecedented low interest rate environment of the last seven years. As the Federal Reserve begins to raise interest rates, the PMIA is positioned to follow those moves.

Figure 10: Pooled Money Investment Account Stats as of April 30, 2015

The Pooled Money Investment Account average effective yield was 0.283 percent as of April 30.

Ending Portfolio

$67.9 billion (See Figure 12 for details.)

Average Workday Investment Activity

$1.548 billion

Average Effective Yield

0.283 percent

Average Investment Life

220 days

Local Agency Investment Fund Ending Portfolio

$21.2 billion (2,500 participating agencies) (See Figure 13 for details.)

Read more about the Pooled Money Investment Account

Figure 11: Average Monthly Yield Comparison

April 2010 Through April 2015

The Treasurer�s Office anticipates that the investment returns for the Pooled Money Investment Account will continue to follow the market.

Source: State Treasurer's Office

Figure 12: PMIA Portfolio Composition – 4/30/15

As of April 30, treasuries made up 47.4 percent of the $67.9 billion in the Pooled Money Investment Account.

Source: State Treasurer's Office

Figure 13: Local Agency Investment Fund

Participation as of 4/30/15: 2,500 Agencies

There are 2,500 agencies participating in the Local Agency Investment Fund, including 1,602 districts.

Source: State Treasurer's Office

*Includes regular and trustee bond accounts.

Read more about the Local Agency Investment Fund.

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During April, Centralized State Treasury System deposits totaled $110 billion, while disbursements totaled $110 billion.

Centralized State Treasury System Activities

The Treasurer�s Centralized State Treasury System provides banking services for the overwhelming majority of State departments and agencies.

The system handles the flow of more than $2 trillion per year in cash funds.

During April, deposits totaled $110 billion, while disbursements totaled $110 billion. (See Figure 14.)

These amounts include all federal, State and local funds flowing through the Centralized Treasury System.

 

 

 

Figure 14: Deposits and Withdrawals By Month, April 2014-April 2015 (In Billions)

During April, Centralized State Treasury System deposits totaled $110 billion, while disbursements totaled $110 billion.

The system also determines the amount of idle State funds available in the Pooled Money Investment Account for investment by the Treasurer’s Investment Division. (These investments were discussed in the Investments section and are reflected in Figure 12.)

During April, total new and rollover investments reached $22.9 billion. (See Figure 15.)

Figure 15: Total Investments By Month, April 2014-April 2015

During April, total new and rollover investments reached $22.9 billion.

Source: State Treasurer's Office

A total of 7 million transactions were processed in April.

Each day, the system also processes hundreds of thousands of State transactions -- including department checks, State Controller�s Office warrants, Women Infant Children (WIC) food instruments, Employment Development Department unemployment and disability checks - submitted by banks and other entities for payment.

During March, total items processed reached 7 million. (See Figure 16.)

 

 

 

 

 

 

Figure 16: Number of Items Processed, April 2014-April 2015 (In Millions)

During April, total items processed reached 7 million.

Source: State Treasurer's Office

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