Are California Muni Bonds Safe?

California is running out of cash. Yields on California Municipal Bonds are therefore pretty high right now. But is it safe to buy them?

According to the Wall Street Journal, it would appear that it is. They asked the California state treasurer Bill Lockyer whether the California public debt was completely safe. “Absolutely, the only way we’re going to default is if there’s a thermonuclear war.”

David Blair, the head of municipal credit research at bond giant Pimco, agrees. “They clearly have the ability to pay,” he said. But he added that the main risk is headline risk, where bad news smacks prices.

The ten-year Treasurys currently yield about 2.5%. California’s bonds yield about 4.2%. And that’s also exempt from federal income tax.

According to Vanguard’s Mr. Smith, the gap between the two has never been so high. The picture is similar for municipals across the country. Panicked investors have dumped everything - and blindly jumped into Treasurys, driving yields down to incredibly low levels. Meanwhile munis are also under pressure because so many states and cities will have to borrow more.

So there’s no doubt that California will pay back the debt. In the worst case, the Federal Reserve would just bail the state out. If they’re willing to bail out car companies, I’m sure they’ll step in for California.

But if there’s more bad news, the yields could go higher still, and the prices of the bonds could fall in value.

Comments

[Norman Lepo...:]

Last year G.v. Schwarzeneger vetoed a hemp law which passed by the people. Now he begs and crys to the Feds that we are broke. Imagine the revenues we sould have if the Gov. did not veto that bill? What a moron!

Jan 19 08:43 AM

[secmaven:]

I live in CA. The inability of the Dems and the Reps to agree on anything in the State legislature is endemic and it takes a 2/3 vote to increase any tax. And CA cannot be "bailed out" by the Feds unless NY, NJ and other states are given equal time at the feed trough. The key fact is that CA state workers make 44% more than for a comparable job in the private sector. Bailing out this state so as to maintain that disparity is nuts.

Jan 19 10:39 AM

[notsosmart:]

every state has to check its workers. the situation is out of control.

Jan 19 11:28 AM

[notsosmart:]

are they AAA rated? insured by aig?. LOL

Jan 19 12:58 PM

[BerkeleyBob:]

I am a retired California state employee. The budget crisis has its roots in Prop. 13, which limited revenues from property taxes and has forced reliance on more volatile revenue sources, and the insane 2/3 majority vote requirement for the legislature to increase taxes or pass a budget. Gov. Schwarzenegger has been slow to address the structural deficit issue; he's better on photo opportunities and sound bites than prolonged attention and when all is said and done, may not be much better than former and recalled governor, Gray Davis. I was not overpaid, could have done better in private practice, but the trade off of a defined contribution pension was worth it. Most state employees earn their pay. I am concerned that unless spending is reduced and revenues increased on a systemic basis and more rational budget planning is implemented, the financial market will not be receptive to California debt, no matter what the discredited rating agencies say.

Jan 19 01:26 PM

[Chancer:]

I am sticking with Muni MM funds which are now Federally insured for the 9/19/08 balance until 4/30/08. By then, either Feds extend their insurance or CA fixes budget.

CA problem is really the bloated state employee payroll (mostly union contract). The Dems won't touch that. Last year CA spent $2B on overtime pay.

The only long term fix is for the Governator to challenge state pay and force the unions into court with the hopes that a judge will permit the union contracts (wages and benefits) to be negotiated down, because CA is verging on bankruptcy. The average CA state employee wage is $80,000; but many dept. heads make $200-$300K and then retire on 75-90% pension pay.

Jan 19 01:56 PM

[claudio.lan...:]

I don't think the burden of the state should be placed on the back of property owners. Does that mean that apartment renters get a free ride? because they don't pay property tax. Doesn't the property tax in large part fund the school system? I personally believe we need to come to an end to era of non contributors draining the country and state of resources. Are we not as citizens suppose to contribute?

Jan 19 02:22 PM

[Nick Gogerty:]

Don't worry I am sure there is lots of bond insurance to cover any statewide or regional defaults....uh oh. That bond insurance problem MBIA, AMBAC etc. may have left the media's eye, but it is still a huge catastrophe. I put strong odds on nationalization/bailou... of bond insurers within 6-12 months time. Structured finance was the tip of the iceberg.

Jan 19 02:35 PM

[socphd71:]

Claudio: Apartment renters pay their property tax indirectly. It is that part of their apartment rent which the owner uses to pay his/her property tax.

Jan 19 04:54 PM

[vaughn:]

Any unthinkable thing will become thinkable in this turmoil time. The terminator may have to bankrupt California to make the point.

Hey, even the US government may rush to the court of bankruptcy in the near future if treasury auction fails.

Jan 19 09:40 PM

[bush wacked:]

California you have been BUSHWACKED, like the rest of us.

Jan 20 09:07 AM

[squawk:]

The law of supply & demand, doctor, is more determinate upon the level of rent a landlord will ask for an apartment than property tax expense apportioned to the unit.

The argument Claudio raises does have a merit in the eyes of the State Legislature, which is why the State has a hefty State income tax well as a sizeable sales tax.


On Jan 19 04:54 PM socphd71 wrote:

> Claudio: Apartment renters pay their property tax indirectly. It
> is that part of their apartment rent which the owner uses to pay
> his/her property tax.

Jan 20 12:05 PM

[Liberalsuns...:]

Gee, you all want answers. Well, here's how to turn CA from a bankrupt liberal cesspool into a utopia.

1) First, let's fire some CA employees. California's spending has risen exponentially in the past 10 years, although its population has not. 40% of the spending is on 'education'. The unions have such a iron grip on the state that Schwarzenegger was unable to even get them to give up 2 of their 14 paid holiday days.

Get rid of the teacher's union, get rid of the administrators, pay the teachers a fair salary (bear in mind that they work < 8 months a year). And CA will have no debt.

2) But why stop there? CA should be the richest state in the union. While you're at it, get rid of the CA public employees union. And fire half of our public employees. Wow, now we have a huge tax surplus.

3) Well, now that we're rolling in money, let's lower corporate and individual tax rates to 4%. Gee, now we have the largest influx of new companies and workers in California's history.

4) Just to make sure we're the best state in the USA, let's put a single-term limit on our state congress (poor things, they're already limited to a mere 14 years) so they stop selling their influence for private interests - such as the unions. Sure, they practically guarantee re-election with redistricting, but they still need to sell lots of influence.

5) Now CA can even attain its liberal dream of offering free public healthcare. THAT can be funded by levying enormous fines on any corporation or individual who hires an illegal alien. This would lead to an exodus of Mexicans, and we wouldn't have to spend a penny capturing them or shipping them back home. As a nice side-effect, CA's crime rate would drop to levels not seen since the 1950's.

6) Not all the Mexicans are here for work of course - half of them are convicted felons plying the drug trade. So let's legalize drugs, starting with Marijuana. CA can tax it the way it taxes cigarettes and raise enormous revenue - while at the same time driving the Mexican cartels out of business.

There you go, losers. Some simple steps to make YOUR state a paradise. But of course that isn't what the liberal whiners who make CA's population really want. What they want is for someone ELSE to pay for all of their social-engineering programs and their enormous socialized workforce - and they have found their messiah in Barak HUSSEIN Obama, a devout socialist who believes that capitalism doesn't work. So let's sit back an enjoy while California and HUSSEIN drag us all down into their socialist hell.

Feb 21 02:24 PM

[Mad Hedge F...:]

I don't think so. I ran into governor Arnold Schwarzenegger at the men’s bathroom at San Francisco’s Mark Hopkins yesterday, much to the distress of his posse of ex Marine bodyguards. He was there to take credit for hammering together a compromise solution to his state’s $42 billion budget fiasco in front of 400 admiring members of the Commonwealth Club of California. After heavies physically dragged hecklers out of the ballroom, the retired Terminator confessed that enduring the tedious, and often contentious negotiations was worse than watching his first movie, “Hercules in New York.” The shortfall was so gigantic, that even firing all 200,000 state workers would not have filled the gap. Well funded special interests from both the right and the left make it impossible to get anything done in Sacramento. Unrestrained gerrymandering means that extremists are rewarded at the polls, and moderates punished. Of course, the budget compromise still requires an amendment to the state constitution which must be approved by voters on May 19, not exactly a sure thing. I have never been a big fan of the “governator,” but a lot of what he said made sense.

Mar 13 05:36 PM

[Sailorgrl88:]

Are California Muni Bonds a safe bet as of 9/29/09? All of the posts seem a bit old so I am aiming for a current opinion. thx

Sep 24 02:33 PM