Pulling your money out of the stormy stock market? Try California.
The stock market's meltdown and real estate's continuing free-fall could make the state's $4 billion sale of short-term notes a draw to individual investors looking for a place to park their cash.
"My overall opinion is that California in general is a good investment," said Tim Smith, president of Roseville-based Smith-Mottini Financial Advisors. "If the state issues a 3 or 3 1/2 percent investment, that's pretty good."
On Tuesday and Wednesday, state Treasurer Bill Lockyer will offer $4 billion in short-term bonds, called revenue advance notes (RAN), to individual investors. He'll open up the sale to institutional buyers on Thursday.
California needs to sell $7 billion in RANs this fiscal year to meet its cash-flow needs. The controller's office estimates the state will run out of cash by Oct. 29, leaving it unable to meet payroll or pay for everything from school programs to feeding prisoners.
RAN sales have become routine, and the cash problem prompting them isn't part of the state's budget miseries. Lockyer plans another RAN sale in early 2009.
But for individual investors, purchasing the notes is a bit different from plopping down money on a CD at your local credit union.
For one thing, the state won't officially release the notes' yield – what investors will receive for their money – until Thursday after the big institutional buyers get a crack at them.
And individuals can only buy the notes in $5,000 increments through one of about 50 state-registered brokerage firms. The firms may charge fees or take a percentage of the investment's return to handle the transaction.
Your broker will quote an "expected yield" when you place an order, but it's no guarantee. If the yield announced Thursday is less, you can cancel the order.
Last year, the state's RANs yielded 3.37 percent, or $168.50 for a $5,000 investment. The rate on these notes could be more or less, depending on demand.
"That's why they wait to announce the interest rate," Smith said. "The more money they get, the lower the interest. They do it that way because, after all, they're paying interest with taxpayers' money."
The interest and principal on the notes must be paid by June 30, 2009, the end of the current fiscal year. The returns are free of state and federal taxes.
Lockyer and other state officials last week publicly worried that paralysis in the credit markets would keep fearful investors from buying RANs.
As leaders searched for alternatives, state Sen. Dean Florez, D-Shafter, suggested that the California Public Employees' Retirement System could purchase some of the notes. Lockyer, who sits on the boards of CalPERS and the California State Teachers' Retirement System, said he would present that idea and others to both funds if needed.
But recent events indicate that government debt may be attracting investor interest. Massachusetts on Wednesday successfully brought $750 million of revenue anticipation notes to market. It priced the notes, which mature May 29, to yield 2.2 percent.
A few other states have found a market for longer-term bonds in the past week.
"All of that taken together, we believe, are encouraging signs that the credit markets are thawing," said Tom Dresslar, a Lockyer spokesman.
The size of the California's RAN sale will further test the appetite of short-term markets following the bankruptcy of Lehman Brothers and other events, said Bay Area securities broker Dick Lam.
"Last couple of weeks have been bad. We've lost clients," said Lam, whose Lam Securities Investments Inc. in San Francisco is registered to sell RANs. "I don't see any risk to investing in the notes – they're backed by the government of California. But some of my clients are running out of cash."
Call The Bee's Jon Ortiz, (916) 321-1043.
