California voters approved $43 billion in general obligation bonds in November. Now the state treasurer hopes he can talk Californians into buying them.
Next week, Bill Lockyer will start a marketing campaign intended for retail investors. The campaign includes radio ads, a new Internet site and an expanded group of brokerage firms that can sell bonds directly to the public without a sales commission or price markup at the initial offering.
The state needs new buyers because it must sell two to three times as many bonds during the next few years as it has in the past.
In addition to the infrastructure bonds approved last year, the treasurer needs to sell $23 billion in general obligation bonds authorized in previous elections. On May 2, Gov. Arnold Schwarzenegger signed a bill authorizing the sale of $7 billion of lease revenue bonds for prisons, also payable from the state's general fund.
Lockyer says when he was campaigning last year, "a question I regularly got asked at editorial boards was, 'Why aren't there ways to buy California bonds that seem available to ordinary investors." His campaign is partly a response to that.
The new Web site, www.buycaliforniabonds.com, will include educational information and links to brokerages that will sell bonds directly to investors.
It is just a home page now, but will be operational by June 11, the same day a radio campaign will begin in the Bay Area and Santa Barbara. The ads will cost the state about $250,000.
The campaign will promote bond sales starting with a $2.5 billion offering on June 20. Most general obligation bonds finance schools, roads, water and other capital projects. Lockyer plans to begin selling the bonds approved last year in 2008.
At least 71 brokerage firms will participate in the June 20 sale, compared with 38 that participated in the last sale in April.
To buy bonds, you must have an account with a participating firm.
When you place an order, you are given an idea of the likely yield. But the final yield is not set until all bonds are sold. If you don't like the final yield, usually you can cancel your order.
Recently, yields ranged from 3.58 percent on one-year California general obligation bonds to 4.48 percent on 30-year bonds.
Interest on municipal bonds is exempt from federal income tax. Bonds issued in California are exempt from California income tax as well. California, like most states, taxes interest from out-of-state municipal bonds.
Last month, the U.S. Supreme Court agreed to hear a case that could prohibit states from taxing out-of-state bonds but not their own. A decision is not expected until next year.
Because of the tax exemption, municipals generally yield less than Treasury and corporate bonds.
Whether you are better off in municipal or taxable bonds depends on your tax bracket, whether you are buying Treasury bonds (which are exempt from state but not federal income tax) or fully taxable bonds, and the relative interest rates.
While it's hard to generalize, California residents in the 28 percent federal bracket or higher are usually better off in California municipal bonds or bond funds. At times, people in the 25 percent bracket also might be better off in munis. Investors should ask a trusted broker or tax adviser to help them decide.
If you buy bonds when they are first issued, you pay no sales commission. (The state pays it.) If you buy bonds after they have been issued, you usually pay a fee, which is typically folded into the price of the bond.
California, like most states, sells bonds in increments of $5,000.
Mark Mesinger, vice president of fixed-income trading at Charles Schwab, notes that most other fixed income securities -- including certificates of deposit, Treasury securities and corporate bonds -- can be purchased for as little as $1,000 at his firm.
Some cities and states have tried to attract small investors by lowering their minimums below $5,000.
"Those programs haven't been that successful," says Joe DeAnda, a spokesman for Lockyer. "Investors who want to purchase less than $5,000 can buy a tax-exempt mutual fund."
Starting with the June 20 sale, brokers will begin selling California general obligation bonds to individuals two days before they offer them to institutions. A retail order period ensures that small investors get all the bonds they want, says Paul Rosenstiel, the state's deputy treasurer.
Institutions, such as mutual funds and insurance companies, typically buy longer-term bonds, in the 20- to 30-year range, while individuals favor maturities of 10 years or less.
The more bonds the state can sell during the retail order period, the fewer will be left for institutions. That could lower the interest rate the state pays.
"Clearly, if there is very strong retail demand, that would result in lower borrowing costs for the issuer," says Steven Permut, senior portfolio manager with American Century Investments.
When the state sold bonds in April, individuals purchased only 7 percent, Lockyer says.
To increase that percentage, he is following the lead of New York City, which has been targeting retail investors since the mid-1990s.
That city always has a retail order period and "we typically have radio advertising and sometimes we have print," says Carol Kostik, New York City's deputy controller for public finance.
"In our last three bond sales, the (percentage bought by individuals) has ranged from 12 to 38 percent," she says.
Lockyer's effort comes at a time when individuals have become a shrinking part of the municipal bond market.
Households held 35.8 percent of municipal securities in 2006, compared with 38.4 percent in 2002, according to the Federal Reserve.
That doesn't count individuals who own them in mutual funds.
Funds, including closed-end and money market funds, held 33 percent of municipal securities in 2006 and 36 percent in 2003.
During the past few years, nontraditional buyers such as hedge funds and foreign investors have become much larger players.
Traditional buyers -- individuals, mutual funds and insurance companies -- mainly buy muni bonds for tax-exempt income.
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