How California’s New Bond Proceeds Will Be Put To Work

The record purchase of $6.5 billion in state bonds during the week of March 23 will allow California to continue, restart or begin construction on hundreds of public works projects, Schwarzenegger administration officials said March 30.

Of the $6.5 billion in bond proceeds – the largest transaction of its kind in the nation’s history — $3.8 billion will be used to address state cash flow needs, one of the functions of the Pooled Money Investment Account in which the bond proceeds are deposited.

In addition to smoothing the state’s cash flow spikes and troughs, the account also loans money to public works projects financed through bond sales so construction can continue while waiting for additional bond revenue in the future.

“The great news is we’re able to reopen that account thanks to the treasurer’s success in selling far more bonds than any one of us expected he would,” said Mike Genest, director of Gov. Arnold Schwarzenegger’s Department of Finance.

Budget issues and cash flow needs have prevented the state from selling any new general obligation bonds for nine months, idling many public works projects and postponing construction of others.

The projects cover the public works spectrum: highways, schools, levees, habitat restoration

Cash flow caused the state to halt construction in December of more than 5,400 projects, 270 projects were exempted. Genest said $1 billion of the bond money would be used to continue work on those.

Another $1 billion will pay off contractors stiffed by the state’s cash problems.

“We plan to pay for all the projects that are owed money,” Genest told reporters.

The remaining $700 million of the bond funds will be devoted to starting new projects, $400 million worth of them highway and congestion-relief related.

Caltrans director Will Kempton said the bond sale last week allows 98 projects, totaling $1.8 billion, to “continue unrestrained.”

That, he said, keeps more than 32,000 Californians working. The additional $400 million allows new projects to be constructed, Kempton said.

There are $349 million in projects “that can actually be awarded in a very short period of time,” Kempton said.

He said bidding on the projects would be completed within 60 days. It takes on average two-and-one-half months after awarding of a contract before actual construction beings, according to Caltrans.

At the last meeting of the board that administers the bond account, the Department of Finance was told to allocate $500 million to various projects including $29 million to the state’s high speed rail project.

The money allows California to compete for $8 billion in President Obama’s stimulus package earmarked for high-speed rail projects around the country.

“We think we can be very successful getting our share of that $8 billion,” Genest said.

While the increase in construction is positive, Genest said there were still plenty of projects on hold because of the state’s financial condition.  In conducting its triage, the state used early creation of jobs as its chief goal.  Second in priority were projects that required swift completion in order to avoid financial or legal penalties.

California last entered the bond market in June 2008, when it issued $1.5 billion of general obligation bonds.

State Treasurer Bill Lockyer said he plans to return to the bond market next month to sell a yet-to-be-determined amount.

Said Genest: “We have a need for more than anything he could possibly sell.”


Filed under: Budget and Economy


  1. Why didn’t this article state what the bonds terms were?

    What is their interest rate(s)?

    When will the pay off?

    Many of these bonds sold were at a 6% interest rate, which is extremely high.

    So who will pay back this interest? Why the taxpayers of course! And no doubt by paying higher taxes down the road, when these bond sellers are long gone…

    Comment by Jay Gould — 3.31.2009 @ 8:27 am

  2. Working to get that answer, Jay. I’m sure the eagerness to buy our paper stems, in large part, from California having the worst bond rating of any state in the country and so, as you suggest, we pay more in interest than other states would. As to who shoulders the burden of paying this off: Our children and our children’s children — just like always. xoxox

    Comment by admin — 3.31.2009 @ 8:58 am

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