CENTRAL VALLEY INFRASTRUCTURE CONFERENCE. Juan Fernandez, J.P. Morgan. November 12, 2009

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1 Juan Fernandez, J.P. Morgan November 12, 2009

2 Local Infrastructure Funding in Federal Funds Local Bond Initiatives Tax supported schools, government buildings, roads Revenue bonds water, sewer, public power State Funding State General Obligation Bonds Non-traditional Sources

3 Local Bond Funding Tax Supported 2/3 vote (55% for schools) Budgetary and policy considerations Revenue Bonds Affordability for ratepayers Proposition 218 requirements Fundamental changes in the municipal bond market The collapse of the monoline insurers forced a greater emphasis on underlying credit Historical Historical Insured Insured Issuance Issuance Volume Volume 500, , , , , , , , ,000 50,000 0 Long Term Municipal Issuance ($ Mm) Percent Insured (%) YTD 60% 50% 40% 30% 20% 10% 0% Generic Generic Secondary Secondary Municipal Municipal Market Market Credit Credit Spreads Spreads (10Y) (10Y) (bp) AA MMD A MMD BAA MMD 0 11/08 1/09 3/09 5/09 7/09 9/09 11/09 Source: J.P. Morgan

4 State Funding Transportation Commission General transportation State Transportation Infrastructure Projects ( STIP ) State Grants & Loans Clean Water SRF Nearly 400 projects Over $4 billion funded Drinking Water SRF

5 State Bond Funding General obligation bonds Voter approved Single purpose Funds schools (State portion of K-12 construction), State universities and community colleges, transportation, water and parks, high speed rail, stem cell State General Fund pays debt service $58.53 billion currently outstanding Lease revenue bonds Legislatively approved Single project State prisons, State universities and colleges, State buildings State General Fund pays debt service $7.96 billion currently outstanding Revenue bonds Department of Water Resources Water & Power Revenue Bonds Department of Transportation GARVEE Bonds

6 State General Obligation Bonds: Current Picture General Obligation bonds can only be issued for voter-approved purposes, primarily consisting of capital projects General Obligation bonds have largely utilized a 30 year fully amortizing principal structure In 2009 year-to-date, the State has issued $ billion of bonds State State of of Annual Annual General General Obligation Obligation Debt Debt Service Service ($ ($ billions) billions) Authorized Authorized and and Outstanding Outstanding Bonds Bonds $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 Source: State Treasurer s Office Authorized $53.18bn (48%) Outstanding $58.53bn (52%)

7 State General Obligation Bonds: Recent Challenges The budget deficit that surfaced in Fall 2008 and rapidly grew to an historic high were addressed in February 2009 after ongoing Legislative discussions February 2009: Initial 2009 Budget Act enacted $42 billion of solutions July 2009: Amended 2009 Budget Act included another $24 billion in solutions The on-going budget crisis resulted in important implications for the State s infrastructure funding: The State could not sell any infrastructure bonds for nine months, from July 2008 to March 2009 Two rating agencies, Moody s and Fitch, downgraded the State s bonds from A-level to BBB-level 0n December 17, 2008 the State halted interim financing for more than 5,000 infrastructure projects. Credit Rating Pressures Moodys: has significantly less flexibility relative to other states when it comes to budgeting and revenue raising. (August 22, 2009) Standard & Poors: Numerous constitutional provisions that separate from most other states in the conduct of its budget and financial management complicate the budget situation for lawmakers. (August 21, 2009) Fitch: Effective budget-making is hampered by inflexibility imposed by voter initiatives, and the state has a history of inability to achieve consensus when faced with financial challenges. (March 24, 2009)

8 State General Obligation Bonds: Comparable Trading Spreads Tax-Exempt Tax-Exempt relative relative to to other other large large issuers issuers year year spreads spreads above above AAA AAA MMD MMD (bps) (bps) CA (Baa1/A) IL (A1/AA-) NYC (Aa3/AA) WA (Aa1/AA+) 0 1-Jul Jul Jul Jul Aug Aug Aug-09 9-Sep Sep Sep-09 9-Oct Oct Oct-09 Taxable Taxable relative relative to to other other large large issuers issuers - Spreads Spreads above above 30-year 30-year UST UST (bps) (bps) (Baa1/A) NJ TPK 2040 (A3/A+) NY MTA 2039 (AA) Univ of CA 2043 (Aa1/AA) UVA 2039 (Aaa/AAA) 1-Jul Jul Jul Aug Aug-09 9-Sep Sep-09 7-Oct Oct-09 4-Nov-09 Source: J.P. Morgan, MSRB Trading data 10 day Moving Averages

9 State General Obligation Bonds: Future Affordability The State Treasurer s Office estimates that the State could issue $ billion of additional General Fund backed bonds from through General Fund debt service payments are expected to grow each year, reaching over $19 billion in Debt service will consume a larger piece of the State s General Fund, growing from the current 6.7% to 10% or more by the middle of the next decade unless the budget improves Projected Projected New New Bond Bond Issuance Issuance vs. vs. Debt Debt Affordability Affordability $ Billions 20 Projected New Bond Issuance ($ Billions) Debt Ratio (%) 12% 15 10% 8% 10 6% 5 4% 2% 0 0% Source: State Treasurer s Office. Debt Affordability Report October 2009.

10 The Safe, Clean and Reliable Drinking Supply Act of 2010 Drought Relief $455 million Water Supply Reliability $1.05 billion Delta Sustainability $2.25 billion Statewide Water System Operational Improvement $3.0 billion Conservation and Watershed Protection $1.785 billion Groundwater Protection and Water Quality $1.0 billion Water Recycling Program $1.0 billion

11 Conclusion Local governments infrastructure needs are many Local funding through bonds can be challenging Federal and State funding can be limited and unpredictable