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Originally Posted by peanut gallery
I read the part about being funded through bonds and untouchable by the general fund, but I don't know much about the bond process. I just have a general sense of unease with anything related to budget and the state. But from what you said, it sounds like my fear is not totally unfounded. If the state felt that they would have to pay too high an interest rate on the bonds, couldn't it decide not to proceed at this time?
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Yes, but it's more complicated. First of all, it's part of the job of the State Treasurer to try to issue the bonds at the most advantageous time. In CA, that clearly would not be until the budget mess is patched and, hopefully, the rating agencies have boosted us back to at least an A rating (currently, we are BBB). Secondly, for a large project like HSR, they almost never issue all the bond at once. Usually, they issue them as money is needed so there's plenty of time to sell those billions.
Finally, there's a new wrinkle--things called "Build America Bonds" that most people have never heard of but states and bond investors know well. These are part of the Obama "stimulus" program and are transforming the municipal bond market:
http://online.wsj.com/article/SB124023363063234893.html
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BABs (Build America Bonds) are part of the federal stimulus plan and provide a 35% rebate on interest costs to issuers or a tax credit to investors, at the issuer's discretion. While a BAB could draw a higher taxable financing cost to the issuer than a tax-exempt bond, the 35% federal government giveback turns it into a lower borrowing rate.
"By placing a large issuer's paper in the taxable market, BABs can free up capacity for the [same issuer] in the tax-exempt buyer base," Bank of America's Merrill Lynch muni analysts said in a report on Monday. "In addition, in the short run, BABs reduce the supply of bonds in the tax-exempt area."
When issued in large amounts and structured differently than the typical municipal bond, these securities could attract nontraditional muni investors, such as pension funds and foreign governments.
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I'd love to get ahold of some of these for my IRA, actually. And the reduction in the supply of traditional tax exempt munis is having a significant effect by increasing the price of regular muni bonds (and thereby lower the interest rates).