State bonds can be bought by investors

October 14, 2008 6:42:41 PM PDT
California is turning to everyday investors before leaning on Wall Street. The state is trying to sell $4 billion in bonds to help keep the government running. Governor Schwarzenegger even bought some on Tuesday.

Depending on the May or June 2009 maturity date, California's new short-term bonds could yield investors as much as 4.5 percent tax-free. The state will use the cash to stay afloat until the spring when the bulk of tax receipts come in. In a new radio ad, Governor Schwarzenegger is hoping Californians will help out.

"We do this, of course, every year in order to pay for schools, health care, and other very important services, and your investment actually will protect those vital services," said the Governor's radio ad.

In the state vault, you'll find California bonds that are typically sold to large investment funds, but in this sale, ordinary people with at least $5,000 get first crack until the end of Wednesday. The state needs to raise $4 billion and so far, nearly 40 percent was sold on the first day. Given the stock market these days and how tight credit has been, that's pretty good.

"We got a very high rating from Moody's Investor Services, one of the three bond rating agencies. They gave our offering the highest possible rating. So we think that's a sign of confidence," said H.D. Palmer, with California's Finance Department.

California bonds are a relatively safe investment. The state has never failed to make a scheduled payment to bond holders, including during the Great Depression. Investment managers think California had to offer an attractive rate because credit is so hard to get now.

"You can get it, you just may have to pay a higher interest rate. The state of California can get investors, like you and me. But we're going to have to be rewarded with higher interest rates in order for us to make that loan," said Joseph Eschleman, from Wachovia Securities.

If the state doesn't raise the entire $4 billion this week, it could go to a bank or the federal government for a loan, but they are a lot more expensive for taxpayers.


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