Californians have a lot on their plate come the November 6th election. At the state level, voters will be asked to approve nearly $14.5 billion in general obligation (GO) and $2 billion in revenue bonds for a consortium of projects. From affordable housing to watershed improvement, California’s municipal market could see near-record GO issuance in 2019 should everything pass.
The largest year-over-year increase in California general obligation debt occurred during the first year of the Schwarzenegger Administration. The State issued nearly $16.6 billion in GO bonds to fund a $35 billion budget gap following the Dot-com bubble and ensuing recall of Gray Davis. The second largest was during the Great Recession as the state sought to fill holes left by the economic downturn. See the chart below for a historical comparison of California’s debt.
Looking ahead at FY 18-19, California could see a net +$11.2 billion increase ($14.5 billion on the ballot less $3.3 billion set to mature) in GO debt outstanding. That would be the third highest amount on record. While a large figure, the market could easily digest this increase for a few reasons. One, the net increase would be less than 2% of California’soverall municipal debt outstanding of over $575 billion. Two, California GO debt has decreased for six consecutive years. A pickup in supply as yields are rising could draw some investors off the sideline. Lastly, it would be unlikely for California to issue all of these bonds in such a short time span. Historically, the state has taken years to roll out voter- approved issuance.
The remaining $2 billion would be a revenue supported bond utilizing a portion of the California Income Tax. Details of the four proposals are below:
A bigger question than potential issuance is timing. A dip in the overall economy and stock market has a rippling effect on California’s income statement. General fund revenues are heavily skewed to personal income taxes (PIT). PIT revenues accounted for nearly 70% of California’s General Fund last year. During an economic downturn California can quickly turn from small surpluses to large deficits. During 2009, PIT revenues only fell -17.6%, but the state’s operating loss increased almost fivefold. The chart below highlights the dramatic reversals California is prone to during a downturn. Fortunately, California has been able to sock away $16 billion in a rainy day fund using surpluses over the past five years to buffer against the next dip.
This report is for informational purposes only and should not be considered a solicitation to buy or sell any security. Neither Equus Private Wealth nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of the Equus Private Wealth Management, LLC. Data for this report was obtained from State of California Comprehensive Annual Financial Reports, California Secretary of State, and California Legislative Analyst’s Office. For questions regarding this report, please call Scott Hanley at (970) 963-2674.