Vol. 1, No. 1, Published May 6, 2015
Latest News: Summary of Borrowing Costs, Debt Issuance, Investments and Treasury Activities
Because California’s bond ratings remain lower than all but two states, investors demand higher yields, which translates into higher borrowing rates.
The State’s most recent 20-year investment yield sits at 3.1 percent, higher than the 2.8 percent yield on a national index, a difference of 0.3 percent. (See Figure 1.)
The difference between the two indices one year earlier was considerably wider: California’s investment yield was 4 percent, while that same national index was at 3.48 percent, a difference of 0.52 percent.
The good news is that current yields demanded by investors in California bonds are sharply lower than they were a year ago, which means that the State’s borrowing costs are also lower.
This is due to two factors:
- Interest rates in general have dropped nearly a full percentage point in the past year.
- Over the past 11 months, all three of the major ratings agencies have upgraded California’s credit ratings. See California’s historical credit ratings.
Figure 1: Borrowing Costs
What does higher investment yield mean for taxpayers?
In general, for every $1 billion in bonds issued, the State will have to offer investment yields that will incur nearly $30 million higher debt service amounts over a 20-year period compared to the national index of AAA-rated, tax-exempt bonds. (See Figure 2.)
Figure 2: Comparing California's Borrowing Costs to a National Index
Source: Municipal Market Data
When it comes to understanding investment yields and borrowing costs, it helps to look at long-term trends.
For a California general obligation bond sale in September 2014, the State had to offer investment yields (i.e.: pay higher rates) almost 0.4 percent higher than the national index. For a general obligation bond sale in March 2015, that difference generally narrowed on bonds with longer maturities. Falling interest rates help California borrow at a lower cost. Figure 3, below, shows the one-year trend in another widely used index, the Bond Buyer 20-Bond Index, over the past year. California’s two most recent offerings are shown as vertical bars.
Figure 3: One-Year Trend of Interest Rates, Selected California Borrowings Shown as Vertical Bars
Source: Bond Buyer 20-Bond Index
Interest rates on State and local government bonds are lower than they were a decade ago. Figure 4 also uses the Bond Buyer 20-Bond Index, but over a longer 10-year period. Larger spikes and dips occurred along the way. The most notable spike occurred during the Great Recession. Note that yields are almost seven-eighths of one percent lower today than they were in 2005. But, there has been a swing of more than two percentage points from high to low over the period. Perhaps most significant is that we remain close to the 10-year low point. That’s good news for California.
Figure 4: 10-Year Trend of Interest Rates on State and Local Government Bonds
Debt Issuance
California State and local governments issued a total of $15.9 billion in debt during the first three months of 2015, a 38 percent increase from the same period in 2014, when $11.5 billion in debt was issued, according to data received by the California Debt and Investment Advisory Commission (CDIAC) as of April 22.1 (See Figure 5.) Debt issuance volume tends to be relatively low in the first part of the calendar year. But this year, a high volume of refinancing debt (which lowers taxpayers' costs), coupled with the downward trend in rates, provoked an unusually high volume of new issues.
A total of $9.1 billion in state and local debt issuance was reported for March 2015, a 98.6 percent increase from March 2014 ($4.6 billion). (See Figure 6.) A considerable part of this increase was directly attributable to the State and its agencies or related entities refinancing some of its outstanding bonds.
Of the $9.1 billion issued, $6.5 billion was issued by the State and its agencies or related entities, while $2.6 billion was issued by local entities. (See Figure 7.)
So far in 2015, the Treasurer has carried out six different refinancings that will together save taxpayers more than $1.79 billion over the life of the bonds.
Finally, it is likely that local governments are now experiencing the positive impacts of the recovery and increasing real estate values. In the aftermath of the Great Recession, many local governments curtailed their debt issuance as they worked hard to regain control of their budgets. Much of the recent activity by local governments may simply be catchup.
For the period from March 16 through April 15, a total of $9.8 billion in debt final sale reports were received by CDIAC. (See Figure 8.) These are the top five areas of volume within the reported final debt sales:
- College, University Housing: $2.2 billion
- Other Purpose: $1.7 billion
- College, University Facility: $1.7 billion
- K-12 School Facility: $1.6 billion
- Public Transit: $934 million
At this time of year, it’s not surprising to see schools leading the way when it comes to issuances. The peak school facility construction season is just starting, and many issuers are looking to get their financing in order before breaking ground on projects. Others are possibly taking advantage of the low-rate environment.
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 5: Cumulative California Public Debt Issuance (In Billions)
Source: California Debt and Investment Advisory Commission
Figure 6: California Public Debt Issuance, March (In Millions)
Source: California Debt and Investment Advisory Commission
Figure 7: State* Vs. Local Debt Issuance, March (In Millions)
* 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 8: Total Reports of Final Sale Received
3/16/2015 Through 4/15/2015, By Purpose (In Millions)
Source: California Debt and Investment Advisory Commission
Read more about debt issued so far this year. See the calendar.
Investments
The Treasurer’s Investments Division manages the State’s excess or idle cash.
The Treasurer invests taxpayer money through the Pooled Money Investment Account (PMIA). This is a comingled 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 March 31, the PMIA balance was $63.5 billion, with an average effective yield of 0.278 percent and an average life of 191 days. (See Figure 9.) The average month-end balance in the PMIA since the beginning of the fiscal year has been $58.222 billion.
The Treasurer’s Office anticipates that the investment returns for the PMIA will continue to follow the market as shown in Figure 10.
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 0.261 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 9: Pooled Money Investment Account Stats as of March 31, 2015
Ending Portfolio
$63.5 billion (See Figure 11 for details.)
Average Workday Investment Activity
$1.274 billion
Average Effective Yield
0.278 percent
Average Investment Life
191 days
Local Agency Investment Fund Ending Portfolio
$20.1 billion (2,507 participating agencies) (See Figure 12 for details.)
Read more about the Pooled Money Investment Account
Figure 10: Average Monthly Yield Comparison
March 2010 Through March 2015
Source: State Treasurer's Office
Figure 11: PMIA Portfolio Composition - 3/31/15
$63.5 billion
Source: State Treasurer's Office
Figure 12: Local Agency Investment Fund
Participation as of 3/31/15: 2,507 Agencies
Source: State Treasurer's Office
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 March, deposits totaled $99.6 billion, while disbursements totaled $99.2 billion. (See Figure 13.)
These amounts include all federal, State and local funds flowing through the Centralized Treasury System.
Figure 13: Deposits and Withdrawals By Month, March 2014-March 2015 (In Billions)
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 Figure11.)
During March, total new and rollover investments reached $12.6 billion. (See Figure 14.)
Figure 14: Total Investments By Month, March 2014-March 2015
Source: State Treasurer's Office
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 6.2 million. (See Figure 15.)
Figure 15: Number of Items Processed, March 2014-March 2015 (In Millions)
Source: State Treasurer's Office