LOS ANGELES -- California plans Wednesday to sell its largest-ever issue of public works bonds for prisons as part of the state's continuing effort to keep pace with its massive criminal population.
The financing, totaling $506 million, marks the first time California has tied zero coupon bonds for its College Savings Bond Program to a prison issue.
The California Public Works Board plans Wednesday to price $466 million of lease revenue prison bonds. The state already marketed a $40.2 million portion of the issue last week for capital appreciation college savings bonds. Moody's Investors Service, Standard & Poor's Corp., and Fitch Investors Service rate the issue double-A.
"Quite frankly, with the exception of the addition of college savings bonds, it's similar to other prison financings we've done," said Ernest C. Van Sant, chief of construction for the Department of Corrections' support branch.
The large prison bond sale follows a $441 million general obligation bond sale by the state on Oct. 30. The GO sale drew attractive rates despite published reports questioning the health of California's economy.
State officials said the prison bond issue may do as well as the GO deal, which produces a 6.06% true interest cost, partly because the Federal Reserve Board moved last week to reduce interest rates.
This week's sale is the state's first prison bond issue since October 1990, when a $163 million issue funded construction of a prison in Madera.
"This is an opportune time to market the largest Public Works Board bond in the state's history because of low interest rates, a high bond rating, and expected market demand, Kathleen Brown, the state treasurer, said in a statement.
The state's request for qualification process for underwriters drew responses from 16 firms. Merrill Lynch & Co. was chosen as senior manager on the financing.
"We are very excited about this financing -- it's the first piece of senior manager business we've had under the new administration," said H. Cody Press 3d, manager of the Western region public finance department for Merrill Lynch in Los Angeles.
Merrill Lynch officials said they expect strong investor demand, despite concerns about California's economy and published reports questioning whether the state can keep its triple-A GO bond rating.
"I think a lot of people are trying to take potshots at California," said J. Timothy Romer, a senior assopciate of Merrill. "But our traders feel that event if you're not a california fund, it's a good thing to have in your portfolio."
Several California traders last week also predicted strong demand for the issue.
Among reasons cited by credit rating analysts for the double-A are the high essentiality of the prison projects, strong legal features, and the California economy.
"The issue is pretty standard to what they've done in the past," said Amy S. Doppelt, a vice president of Fitch. "They know how to do them, and there's not a lot of uncertainty with this."
Ms. Doppelt said Fitch is concerned about California's economy and recent tax collection numbers that point to a mounting budget gap. But she said the rating agency is still bullish on California's longterm prospects, based on the state's history of responding responsibly to past problems.
"Given that track record, we're sort of waiting to see what the numbers mean" in assessing current budget developments, Ms. Doppelt said.
Proceeds from the sale will fund construction of two 2,208-bed prisons in Imperial County, which borders Mexico. A prison near the city of Calipatria is nearly completed -- bond proceeds will reimburse a state pooled money fund for loans used to build the facility. The first inmates are scheduled to arrive in Calipatria this January.
Construction on the other prison, Imperial County South near El Centro, began last July and will be ready for the irst inmates in April 1993.
This week's portion of the bond issue is broken into $74.4 million of serial bonds with maturities ranging from 1994 to 2003, and $381.2 million of term bonds with maturities in 2008, 2011, 2019, and 2021. The Capital appreciation college savers bonds were priced last week to yield from 5.45% in 1996 to 6.50% in 2009.
Like many other states, California cannot build prisons fast enough to house its prison population. Existing facilities are at 182% of official capacity. As of June 30, the state housed 101,995 inmates in a system designed for 54.000.
A positive development emerged early in October, when the Department of Corrections announced a dramatic reduction in the number of drug offenders and parole vilators admitted to state prisons. This reduction could save taxpayers $1.45 billion in construction costs and $345 million in annual operating costs over the next five years.
A corrections officials said the slowing growth rate may reduce prison overcrowding to more manageable levels.
But the cost of operating new prisons poses problems, and the state recently postponed opening certain newly built facilities because of budget cutbacks mandated by Gov. Pete Wilson.
California in the early 1980s embarked on an aggressive prison construction program, creating more than 28,900 new prison beds in 16 new facilities during the last eight years. Ten more facilities, totaling nearly 23,000 beds, are in various stages of design or construction.
State prison projects since 1983 have entailed construction costs of more than $4.5 billion, with general fund monies, state general obligation bonds, and lease revenue bonds covering the expense.
Five voter-approved GO bond acts since 1983 have authorized the sale of $2.562 billion of state prison bonds, of which $2.123 billion have been issued. The state Legislature in the 1980s also authorized the sale of $2 billion of lease revenue bonds to finance prison construction, of which $489.3 million will be left to sell after this week's issue.
Corrections officials may return to the Legislature to ask for increased authorizations of general obligation and lease revenue bonds, but it is unclear when that will happen, Mr. Van Sant said.
Given the difficulty last November in getting voter approval for statewide GO bond measures, California may have to consider a greater reliance on other debt sources -- such as lease revenue bonds -- to build prisons in the 1990s.