Markets won’t force California’s budget hand
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
When Ireland and Greece run big budget deficits, debt investors get angry. But when California says it will need more than $20 billion to balance its budget, bond buyers stay cool. The state is marketing $10 billion of short-term debt that matures next year to big and small investors at interest rates that would make Dublin or Athens green with envy.
The Golden State hopes to pay just 1 to 1.5 percent on its new notes, roughly matching what it coughed up on similar debt last year. Demand isn’t as robust as then, but considering the state legislature’s dithering over the last budget — they blew the deadline by 100 days — it’s remarkable that investors haven’t been more demanding. After all, California’s fiscal woes are far from over. California’s Legislative Analysts Office projects a $25.4 billion shortfall this year and next and chronic $20 billion gaps through 2016.
Rising borrowing costs can snap legislators out of any complacency, but investors in California debt aren’t showing any sign of forcing yields sharply higher. That’s partly because there’s little reason to believe the state will default. The constitution mandates that investors in its long-term debt are paid before almost everyone else, the exception being the education system. It also has built-in flexibility to honor its short-term commitments. With debt service costs expected to peak below 10 percent of revenue, California shouldn’t have to stretch to stay current on its interest payments.
That means buy-and-hold investors — a good portion of municipal bond buyers — can feel comfortable donning their ear plugs when the scaremongering of bankruptcy and default inevitably reemerges around budget negotiations. Investors in local municipal debt, however, can’t afford to be so sanguine. Counties, for example, are heavily dependent on state funding. Any cuts from Californian legislators in Sacramento could put them on shakier ground.
There are limits to investors’ patience, however. If California were to lose its top notch ratings for short-term debt, for example, money market funds — big buyers of such debt — would have to stop loading up. For now though, voters and taxpayers will have to whip Sacramento into shape. The bond market isn’t likely to help them much.