BOND AID ECONOMIC RECOVERY CERTIFICATES SHOULD HELP PUT CALIFORNIA'S FINANCES BACK IN BALANCE.

Byline: Jabulani Leffall Staff Writer

Buy a bit of California; save the state from calamity.

Gov. Arnold Schwarzenegger's plan to restore the state's financial footing was formally launched this month with the public offering of $7 billion in bonds, spawning the largest one-day municipal bond sale in history. The remainder of the Economic Recovery Bonds will be issued by the middle of next month.

Institutional investors typically grab the lion's share of public bonds, but does it make sense for casual investors to help float a $15 billion loan to a nearly bankrupt state whose credit has been downgraded by Wall Street to near junk bond status?

It may not be as crazy as it sounds. These bonds are paid off from allocated sales tax revenues and so enjoy a high rating from Wall Street, and the interest on them is tax-exempt. The Economic Recovery Bonds approved by voters in March could be a good investment for the right person who can afford the $5,000 minimum.

``The state is going to structure these bonds so that they reach a pretty wide array of investors,'' said David Blair, vice president and senior analyst for Nuveen Investments. ``Sure you'll have institutional buyers, but it'll also be for people who are looking for long-term growth.''

The Economic Recovery Bond, which had its first public offering on May 5 of $7.9 billion, was so popular with investors that underwriters in the investment banking arena received double the available number.

The bonds, sold at a true interest cost of 4.025 percent, also attracted record retail orders totaling $2.3 billion. Institutional buyers gobbled up just under $6 billion.

``That's pretty impressive,'' said David Blair, vice president and senior analyst for Nuveen Investments. ``Clearly, I think the high quality of the bond and its strong security structure contributed to investors coming out in droves the way they did.''

Returns on bonds, which are typically a secure and predictable investment, can be used as savings, for retirement funds and even for financing a college education upon maturity.

But bonds are a particularly good move for tax savings. Yields on the recovery bonds are projected to be as high as 6 percent and interest income is exempt from both state and federal tax.

``Generally, the higher the tax bracket the better the benefit,'' said Amy Resnick, editor-in-chief of Bond Buyer, a publication covering public finance.

While issuing the caveat that anyone looking to buy into the state should consult a financial adviser, Resnick added that the Economic Recovery Bond will be for the prudent buy-and-hold investor.

Certainly for its part, the state is hoping that individual investors will continue to come out en masse. The governor and state Controller Steve Westly jointly campaigned for passage of the bond, and that burst of high-profile pitch is what experts say attracted wider attention.

That isn't by accident.

Treasurer Phil Angelides, the leading opponent of the recovery plan, has indicated that the state is targeting the retail investor. Usually the issuers of municipal bonds such as these look to sell at least one-third of the issue on the retail market.

``In a very uncertain world, (the bond issue) remains a safe haven and a good, secure investment,'' Angelides said in the wake of the sale.

That these bonds will be repaid by sales tax is music to analysts' ears because there is little likelihood of default.

The three top credit rating agencies all differentiated this bond from all other general obligations that the state owes.

Standard & Poor's assigned a preliminary credit rating of AA minus - a far cry from the BBB minus rating for the state's general obligation bonds. Fitch Ratings upgraded the bond to A plus and Moody's to AA minus status. The higher the rating on the bonds, the lower the rates and the easier it is to attract investors.

James Peterson of the Schwab Center for Investment Research expects a continued demand for the bonds but cautions that as interest rates rise the value of these bonds could be affected.

``Most bond yields have already inched up in recent weeks in anticipation of Fed hiking its rate,'' Peterson said. ``So if bond yields continue to increase, the value of these California bonds will go down, as will prices of all existing bonds.''

Up until Proposition 57 - the voter-approved ballot measure that made this debt issuance possible - passed in March the state had been keeping the deficit at bay by issuing what is called short-term bridge financing with maturities of less than a year.

The state has issued $11 billion in warrants, which are debt obligations similar to bonds, and $3 billion in revenue anticipation notes, which are paid back when the state rakes in more money. These are due next month.

The state will use the proceeds of the new bond sale to remove existing debt from its balance sheet by retiring some of the short-term financing.

In plain English it's new debt on top of old debt.

``I think the governor realizes that borrowing in significant amounts going forward is not a viable option,'' Blair said. ``They may have to find other ways to shore up revenue and they have to hope to some extent that the economy helps them as well.''

Jabulani Leffall, [phone]

jabulani.leffall(at)dailynews.com

BIRTH OF THE BOND

The jury is still out on whether the bond issue is just a Band-Aid fix for an ongoing fiscal crisis or a financial bridge to a more stable future for the state. California will borrow up to $15 billion to create a stopgap that will prevent a fiscal disaster for the state. Here's how the life of the bond unfolds.

March 2: Voters approve Propositions 57 and 58

April 10: Secretary of state certifies election results

April 20: Economic Recovery Bond Finance Committee approves bond

April 26: State treasurer launches marketing of bond

May 3-4: First issue of $7 billion in secured debt

Monday-June 15: Pricing and issuance of remainder of bond

CAPTION(S):

drawing, box

Drawing:

(color) BOND AID

Warren Huskey/Staff Artist

Box:

BIRTH OF THE BOND (see text)