Mon Dec 14, 2009 5:55pm EST

WASHINGTON, Dec 14 (Reuters) – California, the largest borrower among U.S. states, may see its debt interest costs nearly double to over $10 billion in 2020, the state treasurer reported on Monday.

General fund debt service on outstanding bonds, authorized but unissued bonds and proposed water bonds is set to peak in fiscal 2020 at $10.45 billion, compared with a current level around $6 billion, and stay near that level through fiscal 2028, Treasurer Bill Lockyer said in a presentation for the state legislature.

Crippled by the housing downturn and high unemployment, California has been one of the worst-hit states during the U.S. recession. Revenue has been limited by a fall in property taxes and the state has had to borrow to keep cash flowing.

That borrowing does not come cheap as California has low credit ratings.

Despite its woes, the state is unlikely to default on its debt given its taxing power and the size of its economy.

As of Dec. 1, California had $83.5 billion of outstanding long-term debt, almost all of it in fixed-rate bonds. Lockyer noted that the Golden State does not have any interest rate swaps.

Lockyer, who has spent nearly two years pressing for changes to how municipal bonds are rated, said California pays 21.3 percent more on interest on its low-rated debt than states with the highest ratings.

Moody’s Investors Service rates California’s general obligation debt at Baa1, or three notches above junk status. Standard & Poor’s rates it at A, or sixth-highest investment grade. Fitch Ratings rates it at BBB, or two notches above junk.

All three are the lowest ratings of the 10 most populous states, said Lockyer.

The spread between the index of California GO bonds and AAA-rated bonds compiled by Municipal Market Data currently stands at 172 basis points, an all-time high.

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