How California's Money Crisis Affects ETFs

California is home to the world’s eighth-largest economy, but the state is also leading the biggest budget crisis with out a deficit to fall back on, causing despair for related bonds and ETFs.

The gap between projected revenues and spending during this fiscal year and next amounts to $41.6 billion, which is almost half the total sum that the state expects to raise next year, reports The Economist. According to Gov. Arnold Schwarzenegger, the budget crisis will include wide-ranging budget cuts especially to those non-viable schools, and punishing tax increases. The sales tax would rise 1.5% until 2012. The budget assumes that infrastructure spending will increase, that firefighting costs will be half of what they spent this year and that the state will be able to sell $5 billion in bonds by July.

Let’s hope this all falls into place, because what if it does not? Congress finds this plan distasteful, as cuts to health care and education should not be feasible. So far, the plan will face much opposition in the State capital.

• iShares S&P California Muni Bond Fund (CMF): up 2.2% year-to-date and a 3.6% yield

For the first time in four years, the state budgets in 20 states are coming up short and 35-40 states could face cuts in 2009, according to Justin Ewers on U.S. News & World Report. Other states, among many more, that are facing a budget crisis right now:

New York is another struggling state. Access to muni bonds there can be had through the SPDR Lehman New York Municipal Bond (INY), which is up 2.8% so far this year and has a 4.2% yield.

Comments

[donzelion:]

If you think California looks bad, what about New York? There you have half the debt and a quarter the economy...and once Wall Street completes its implosion, quite possibly even less than that. Ouch!

Jan 15 10:12 AM

[Urbane Gori...:]

Watch those bond funds plummet when they hear that Arnold intends to pay with State IOUs as allowed within our charter.... As to the 1 1/2 % 'temporary' sales tax increase.... Sure.. When was the last time a tax was really rolled back. I really don't see our State coming out of this mess until the economy ramps back up again and I can see a gradual improvement in 2011, but not a return to 2006 and 2007 levels. The tax stays...

jegan ;-)

Jan 15 05:49 PM

[JohnB:]

Oops, maybe we shouldn't have given away the store to public employees' unions?

Jan 16 12:44 AM