California Warns Bond Buyers of Increasing Risks Posed by Trump

(Bloomberg) -- California sees the nation’s capital as a growing risk.

In documents circulated ahead its $2.3 billion bond sale next week, the state added four potential dangers that investors should consider before buying its debt. All but one has to do with the federal government.

The straightforward recitation of the threats underscores the escalating tensions between the administration of President Donald Trump and Democratic Governor Gavin Newsom, who took office in January. Last week alone, federal officials moved to cancel and claw back funds for the state’s high-speed rail project. Talks between state and federal agencies to craft a compromise on vehicle emissions and fuel economy standards have broken down. And California led a group of states that sued over Trump’s bid to use emergency powers to finance a border wall.

In the bond documents, California listed 12 risks, four of which weren’t included when it sold general obligation debt in October. They are:

• TAX-LAW CHANGE: The new cap on state and local tax deductions has cast uncertainty over its revenue forecasts. By reducing the incentive to file returns early, the shift led to an 86 percent decline in December 2018’s estimated tax payments from a year earlier. California said such behavioral changes could have significant impact on revenue and cash flow, and that wealthy residents whose tax bills rise may leave the state.
• TRADE WAR: The ongoing dispute between the U.S. and China, California’s third-largest trading partner, "could have negative effects on the state’s economy." Chinese imports in 2017 accounted for 36 percent of the state’s total imports, and exports to China accounted for 9.6 percent of all exports.
• SHUTDOWNS: The recent government shutdown forced federal employees to go without paychecks, creating an economic risk to states with a lot of government workers. In 2018, federal employees accounted for 1.5 percent of total nonfarm employment in California.
• HOUSING PRICES: Home construction continues to lag population growth. This could lead to limits on the number of jobs available as well as feeding the rise in housing costs.

In another difference, California provided more detail on the threat of recession, detailing it over five paragraphs compared with one in the October offering documents. It flagged stock buybacks as a consequence of the federal tax overhaul and said the little growth in company investment and workers’ wages "raises concerns of sustained inequality and low consumer purchasing power."

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