State Sells $3 Billion in Notes

Strong demand from individual investors helped the cash-short state of California sell $3 billion in 11-month revenue anticipation notes with relative ease Wednesday.

The fixed-rate portion of the notes, or RANs, was originally priced to yield 4.2% annualized. But heavy demand allowed the deal manager, Bank of America, to set the final yield at 4.1%.

Still, the cost to the state is high, reflecting its ongoing budget problems: Other, fiscally healthier states would pay as little as 3.9% on similar notes.

About $2.3 billion worth of the notes were sold at the fixed rate; the other $700 million were sold as floating-rate securities.

The deal was helped by an Internal Revenue Service decision Tuesday clarifying a potentially sticky tax issue. The IRS exempted the California notes and others from a recent tax ruling that could have resulted in the notes being considered “zero-coupon” securities for tax purposes. The IRS said it needs more time to study the possible effects of the ruling.

The RAN offering was the second part of a $7-billion, short-term borrowing program necessitated by the state’s budget crunch. Last week, California sold $4 billion in 21-month securities.

At 4.1%--exempt from federal and state income tax--the yield on the RANs is worth significantly more, depending on the investor’s tax bracket.

In the 34.7% combined state and federal bracket (taxable income of $61,241 to $91,850 for joint filers), a 4.1% tax-free yield is the same as a 6.28% fully taxable yield.