Bloomberg News

California, with the lowest debt rating among the states, paid higher yields relative to other municipal borrowers to sell $1.7 billion in bonds amid a legislative deadlock over closing a record budget deficit.

The state paid 0.64 percentage point more than top-rated municipal debt based on the state's 5 percent yield on a 30-year bond, according to Municipal Market Data figures.

California lawmakers are "not fixing their problem" and that has helped push yields higher in combination with rising debt sales by the state, said Stephen Bauer, who helps oversee $2 billion in municipal bonds for a unit of Safeco Corp. in Seattle. Bauer said his company ordered a "small" number of bonds Thursday.

The Legislature is divided over plans for closing a $38 billion deficit and missed a Sunday deadline for passing a budget. Gov. Gray Davis and his fellow Democrats in the Legislature favor a half-cent sales tax increase to help close the gap. State Republicans oppose the tax increase and want deeper spending cuts.

A California resident in the top federal and state income tax brackets would need to buy a taxable bond yielding 8.43 percent to match a 5 percent tax-free yield. That calculation includes the recent federal tax rate cut.

In April, California sold $2 billion in bonds at yields that were about 0.5 percentage point or higher than top-rated municipal debt, depending on the maturity.

California is the state rated lowest by Standard & Poor's and Fitch Ratings with an A grade on general obligation bonds. Moody's Investors Service rates the bonds A2, tied for the lowest state assessment with New York and Louisiana.

Moody's on Monday lowered California's credit outlook to negative from stable, which signals a possible downgrade within two years. Moody's cited concern about the budget stalemate and said negotiations may be complicated by a drive for an election to remove Davis from office.

A group of investment banks led by Morgan Stanley raised rates Thursday on the California bonds from yields offered during a two-day order period for individual investors, who ordered about $314 million of the sale. The yield Thursday on the 20-year maturity was 11 basis points higher than Wednesday and 25 basis points more than Tuesday's initial rate. A basis point is 0.01 percentage point.