California to issue IOUs after missing budget deadline; muni bond rating at risk
Filed under: Economy, People, Investing
Beginning tomorrow, California will issue IOUs to elderly, disabled and welfare recipients who are due checks because the governor and the legislature failed to agree on a spending plan before the state's budget year begins today.
Treasurer Bill Lockyer said California won't default on any bonds, which have claims second only to schools. Schwarzenegger's administration forecasts that the state will spend $4.5 billion on debt service this year, but only $16 million is due in July.
Bond rating agencies could act as early as today to lower California's bond ratings, as they've warned in the past few weeks. Both Moody's and S&P have threatened multistep downgrades if California doesn't work out its budget problems, which could mean the state's bonds would be near junk level. California currently has the lowest bond rating of any state in the U.S.
Negotiations between Governor Arnold Schwarzenegger, fellow Republicans and Democrats broke down last night and they missed the midnight budget deadline. If bond ratings drop to near or below junk status California's debt service payments will go even higher for any debt it may need. Bloomberg reports the value of its bonds maturing in 2037 traded for as little as 83.35 cents on the dollar yesterday to yield 6.27 percent. In May the bond sold for 97.25 cents.
Politicians failed to reach a deal because Republicans want to eliminate welfare programs and deny government health insurance to 1 million low-income children. Democrats want fewer reductions and suggest some tax increase instead to make up for the more than $20 billion shortfall caused primarily by the recession. The recession has reduced state revenue by 20 percent.
Many blame California's current dilemma on Proposition 13 passed back in the 1970s. "We've chosen mediocre public service and more private money. We've decided not to tax ourselves as much. We've basically turned our back on schools. It's a choice we made within our state," John Mockler, former Executive Director of the California State Board of Education, contends in an interview with the Merrow Report.
Proposition 13 is not the only tax-cutting measure that impacted the state's budget. Republicans have steadily cut taxes, while Democrats have tried to minimize cuts to the social and education programs in the state. Instead of reaching a compromise on the matter, the state has funded its shortfall by issuing bonds.
Now that the bond agencies have said enough is enough, California politicians have some hard choices to make. Unfortunately for the rest of us, if California munis are ranked at junk status, it will put the rest of the municipal bond market in panic. Many institutional bond holders will need to reassess the safety of municipal bonds and the entire market may take a hit. Add to this pressure the fact that other states are facing significant shortfalls in income because of the recession and we have a muni bond storm in the making. Investors holding municipal bonds may want to think twice about the safety of that segment of their investment portfolio.
Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Value Investing.
D-Day for Harry Reid: Can he wrangle 60 votes for Senate health reform bill?
Fed stalls on Chinese bank deal, costs taxpayers $1.7 billion
Dell in a handbasket: Should founder Michael Dell resign?
Reader Comments (Page 1 of 6)
7-01-2009 @ 12:01PM
Jeff B. said...
Go Governor! This stupid State has brought this upon themselves. High taxes, highest minimum wage. Trying all kinds of programs that do not pay for themselves or do not have appropriate funding from the State. Did you really think an economic slow-down was never going to come? Did you ever think of putting money aside? This example is what the entire country needs to have their eyes opened before a complete collapse happens to us all!!
Reply
7-01-2009 @ 11:45AM
CARY said...
THIS IS A GREAT BUYING OPPTY- IF ONE REALLY BELIEVES THAT STATES WILL DEFAULT ON G.O.
AND OTHER ESSENTIAL SERVICES-THEN THEY SHOULDNT HAVE MUCH FAITH IN THE TREASURY EITHER
DOES ONE REALLY BELIEVE- THESE G.O.S WILL ALL DEFAULT AND THERE WOULDNT BE ARMAGEDON
Reply
7-01-2009 @ 11:55AM
Eddie said...
CANT YOU SEE WE NEED TO DEPORT AND REMOVE EVERY DAMN ILLEGAL ALEIN IN THIS STATE AND NATION. No country can sustain the load these people put on our medical cost, welfare, food stamp, housing and educational cost. Why do you think Mexico is broke....well if we dont have the balls or guts to throw them out then we are finished as a Nation. These bleeding heart fools have brought this follie upon us...send them back with these vermin.
Reply
7-01-2009 @ 12:01PM
GRAY said...
YOU ARE SO RIGHT!
7-01-2009 @ 3:52PM
EasyE said...
Come on you really think the problem is illegal immigrants? Instead of taking money like you say they do, they help the economy by paying taxes and not getting a dime back, illegal immigrants are not able to obtain welfare because of their legal status, your just another moron!
7-01-2009 @ 7:46PM
rs said...
perfectly stated!
you should be the president of the united states!
7-01-2009 @ 11:59AM
g mann said...
EDDIE IS EXACTLY RIGHT! DEPORT THE ILLEGALS IN CALIFORNIA AND UNEMPLOYMENT FALLS, MORE TAXES ARE RECEIVED, AND WELFARE IS REDUCED BY 60%. ALSO FEWER CITIZENS WOULD BE KILLED BY THESE OUTLAWS, WAKE UP AMERICA!
Reply
7-01-2009 @ 12:06PM
Ski said...
I like that way of paying. What's good for California is good for me. I can't wait to pay with a I.O.U.!!! I think I will purchase some stocks the same way. Then I will pay my electical bill the same way.
Reply
7-01-2009 @ 12:08PM
Dan said...
As soon as the illegals and scammers start receiving their IOU's in lew of free money they will move. Smart move Arnold
Reply
7-01-2009 @ 3:26PM
deb said...
I hope you are right! Why are we supporting all those "ILLEGALS?" Time to stock up on can goods, bottled water, and bullets.
7-01-2009 @ 12:09PM
john said...
NO- i do not want this to happen- but i have to ask a question... IF the argument for BAILOUTS was "systemic risk" then HOW can the GOV'T walk away from CA which has the 6th largest economy GDP in the WORLD?? they go under ORT even close and you don't think that factors into the systemic risk case?? DO NOT BAIL THEM OUT... but it also CRUSHES the logical argument of to big to fail IF you don't.... so incredibly sad that NO ONE is willing to lead this country/states through the sea of difficult decisions we face... remember ALL- the choices going forward will be "what are you willing to give up" since there is NO perfect answer...
Reply
7-01-2009 @ 12:17PM
David said...
This is where many states and the U. S. government are headed. Previous Administations and Congress have spent without regard to where the money is coming from and passed on many mandated unfunded programs to States. The current Administration and Congress are spending money like it is going out of style. The value of the dollar has dropped. It all just comes down to the fact that you cannot spend more than you have. The U. S. govenment is the world's largest Ponzi scheme ever.
Reply
7-01-2009 @ 12:23PM
JON said...
Here is a great lesson in common sense. If you want to know where America is headed, look to California. Liberals have been running this state for years.
Reply
7-01-2009 @ 2:38PM
robert ward said...
Jon -
You are so right. Ever since New York City hit the dirt in the 80's, California has been rushing to fail in the same way.
The illegal alien issue is going to end in a bad way, when it shouldn't have even gotten anywhere near this point. But they must be cut off, and California should bill Mexico for doing what Mexico can't even do for itself or her own people.
California has "liberaled" itself into the same mindless failure as Mexico. California has allowed the failure of Mexico to overwhelm her borders. Enforcing the law against any illegal alien is not racisim, California proves we are under attack, and must defend ourselves from liberals, Illegals and being afraid to act.
7-01-2009 @ 12:26PM
Aldo said...
I say California should keep building schools, and providing health and human services to "all" illegal alliens (as they have been) so that the state can go completely bankrupt! I say, Democrats, keep spending money you do not have, and since everyone is doing such a great job, give everyone a raise and borrow money or issue IOU's to finance the fiasco! After all, once you end up getting thrown out of office; or the state actually does go bankrupt (whichever comes first) all the crooked politicians will be able to walk away with their pockets lined up! Oh yeah, and keep building more Indian Casinos so complulsive people don't have to travel to Vegas to loose all their saving! (those are great for the community!) Oh yeah, and whatever happenned to all those millions schools were going to get from the Lotto? I guess all the crooked Lotto Executives are really quiet now that they managed to find enought idiots (voters) to give them what they wanted! I say we sell the state to Mexico, after, they practically already took it over! LOL
Reply
7-01-2009 @ 12:27PM
ray said...
VOTE OUT ALL INCUMBENTS STATE AND FEDERAL, YOU STUPID AMERICANS
Reply
7-01-2009 @ 12:27PM
sgentilejr said...
If on April 15th I owed income taxes to the state and I did not pay up in full the state would charge me interest and penalties.
How would the state react if I sent them an IOU for the full amount of taxes I owe to the state?????
Reply
7-01-2009 @ 12:28PM
Kim said...
THE BEGINNING OF THE END ..... WHERE CALIFORNIA GOES, SO GOES THE NATION....
Reply
7-01-2009 @ 12:27PM
Michael said...
"Many blame California's current dilemma on Proposition 13 passed back in the 1970s. "We've chosen mediocre public service and more private money. We've decided not to tax ourselves as much. We've basically turned our back on schools."
Please Mr. Mockler, we Californians are among the highest taxed in the country. Irresponsible spending at all levels of government is the culprit and the taxpayers have had enough.
Reply
7-01-2009 @ 12:48PM
Dave said...
People-- Why is it so obvious of what needs to be done to us and not the politicians? Do you think they care more about themselves than our once great nation?
Reply