California Bonds Downgraded Again

S&P downgraded California's debt again:

• http://online.wsj.com/article/SB123306751662819585.html
• http://www.latimes.com/news/local/la-me-budget4-2009feb04,0,2705277.story

California's debt is now the lowest rated in the entire United States. What does this mean for investors? If you don't think California is going to default, you may be able to get good prices on California bonds. As a California resident, however, I am disgusted--and I even predicted this bond downgrade here (on December 19, 2007):

California’s bond ratings have gone from AAA to single A and are approaching status that is slightly above junk.

I apparently live in a state where legislators can't agree that cutting spending is essential to achieving a balanced budget. My representatives must believe they don't have to exercise fiscal discipline. This stance is troubling when the recession guarantees that state tax receipts will be lower than previous years. Where's Mr. Smith when you need him?

Comments

[kelm:]

I think we will see multiple municipalities and states forced either to default or close to it and expect the debts will somehow win their way onto the federal books. Neither congress nor the administration is talking about this yet but this will be the big story this year along with corporate defaults.

Feb 05 10:06 AM

[Gedankonomist:]

I was reading a story yesterday about how many mom & pop gas stations in California are closing their gas pumps rather than deal with the the added regulatory burden the California legislature has recently saddled them with.

California residents think they can have all these environmental regulations (mostly so they can feel good about themselves) and not suffer economically for it.

And guess what? When the state collapses, amen it's happening even now, guess where the Californians will go? They will come to your neighborhoods and your towns, and impose the same BS on your own governments, because they have not learned a thing from their own mistakes.

Feb 05 11:08 AM

[Rob Viglione:]

As a relatively new California resident I am similarly disgusted with this behavior. Public officials have for too long held the State hostage to their social experiementation. Problem is that they are using our resources and have mortgaged our future for their ends.

Unfortunately, California is not alone. Most local and state governments have marched down the same path, right behind the Federal government. The only difference is that the Federal bureaucrats can print money to keep the party going longer.

Feb 05 01:13 PM

[BerkeleyBob:]

There's been some talk from good gub'mint types that a constitutional convention may be necessary to restructure revenue and expenditures. The downgrade of bonds is a) expensive in higher interest and b) a consequence of massive irresponsibility by Arnold and the legislature. The source of the problem of revenue is Prop 13, which benefits corporations and not granny's cottage and the 2/3 requirement to raise taxes. It is not environmental regulation. California was right on greenhouse gas and climate change, Bush and his ilk wrong.

Feb 05 02:05 PM

[henarl:]

R Jensen has it right. Having been born (in 1930) and raised in California, I am now thankful that I left 30 years ago.

Feb 05 03:04 PM

[Did U Think...:]

You really don't get it do you? This is not a recession, it's a depression and those guys know it. They are fighting for their own jobs and they know that he who doles out the most pork to a hurting people will be seen as a "good" politician, exactly the opposite of what is needed. It is the people through it's herding, socialistic tendencies which control the politician's actions. If they weren't elected and instead appointed, etc. then it would be a whole different story. Unfortunately absolute power corrupts absolutely and they would just install themselves as dictators, create their own private and highly paid security force, etc. They would use taxpayer money to enslave the people by force instead of the current mechanism (i.e. by debt). At least you can file for bankruptcy on debt. The force route is a little harder to deal with once it is in place.

Feb 05 06:08 PM

[k9s-4-k8:]

I'm a resident of California and watch with mild amusement at the circus in Sacramento. I used to blame legislators for the seriously stupid and economically bankrupt methodology they use in managing this state. No longer. I've seen the light. Its all those brain dead voters who listen to the media for their truth. We need this fiasco. California voters need a swift kick in the head to wake from their stupor. We need a paradigm shift in ideology that won't occur without the kind of pain that leaves lasting images and periodic nightmares. The types of solutions that legislators opt for will chase business from the state in droves. The breaking point should occur before the 2010 elections.

Feb 05 07:01 PM

[devassocx:]

someone here wrote that the problem in part is prop 13. Just not true.

The problem is state overspending and as someone else wrote, brain dead
voters who consistently have approved stupid massive bonds and bizarre
rules and regulations and oh yes, a huge illegal immigrant population
that are takers and not givers.

The state needs to go insolvent and reorg...that is the only answer. Taxes
and fees are already at choking levels...there will never be enough revenue
to satisfy the liberal bent of those in charge.

Hint: don't buy any hi yield California bonds...the risk isn't worth it. If you
already have some, sell them asap.

Feb 05 11:01 PM

[Matthew Rafat:]

Some people have made comments about undocumented workers on this post. For the record, I do _NOT_ agree that undocumented workers are a cause of California's budget crisis. Once you factor in the amount they pay in sales taxes and gasoline taxes, it's hard to say whether undocumented workers are a financial net positive or negative.

in addition, without the immigrant population, both legal and illegal, America's population would be declining--which would be bad news for all entitlement programs, especially Medicare and Social Security. You have to factor in the children of undocumented workers and the taxes these children will pay over the next 60 years if you want to make a reasoned analysis.

Feb 06 12:20 AM

[devassocx:]

Mr. Rafat...you might disagree but I think if you inspect the numbers
available from multiple sources you cannot come to any conclusion
other that illegal aliens are costing Calfiornia a bundle. Additionally, they
export billions of $ back to Mexico where it represents the #2 source of
revenue behind oil for Mexico.

If your basing the soundness of our entitlement programs on an ever expanding
population when does that end? When we are standing shoulder to shoulder
with people throughout the state? What sort of lifestyle do you think that
will bring?

That is a fool's game and will only end very badly with poverty for all.

If you don't believe that, I refer you to China or India for living examples.

Feb 06 12:51 AM

[devassocx:]

Mr. Rafat...additionally, you refer to illegal aliens as undocumented workers.
That may be the political correct term but the actual term is
ILLEGAL ALIEN. Further, not all of them work, so your terminology
is beyond bogus!

Feb 06 12:54 AM

[Matthew Rafat:]

To "devassocx": I don't claim to know exactly how much undocumented workers cost or add to California's finances. I was just pointing out that a reasonable analysis of the net gain or loss of undocumented workers must include the children of these undocumented workers and their future contributions. For me, the turning point is the reality of the situation--it would be nearly impossible to collect all the undocumented workers and deport them to Canada, Mexico, etc. Once I realized this, I started to focus more on how to make the children of undocumented workers productive, taxpaying residents.

Feb 06 02:12 PM

[k9s-4-k8:]

Your argument above using payroll taxes as a reason for welcoming illegal aliens is quite flawed. How does the payroll taxes help specifically CALIFORNIA taxpayers? Not at all. Its a national system. But we do pay for medicaid and we do pay to educate, and we do pay for law enforcement and incarceration. As for sales taxes paid? How much sales tax will low income earners who save and send money home pay anyway?
But lets get back to payroll taxes. Even if they use a bogus Social Security card, many are paid as 1099 contract workers. Couple of good reasons for that. First, business still gets the write off and no payroll tax for the business. Secondly, audits are rare among low income earners so why file? Yet still, some will have payroll taxes paid. But these are often low paying jobs where the payroll tax paid is hardly offsetting anything. While its true some will never collect, many more will, and being generally lower income earners they will likely receive back a higher percent of what they pay in than higher income earners. While Social Security taxes are still currently capped and adjusted with inflation each year, those that receive benefits often later pay taxes on a portion of that income when they exceed certain income levels currently about $50,000 for a joint filing. For medicare, there is no cap, though many wealthy will never use medicare at all.
What about Medicaid? Our medicaid system actually is quite a draw for pregnant Mexican girls. They know the rules. They won't be turned away, their baby will become an automatic citizen and they will receive legal resident alien status. It makes for a better start on life than what they had before, but the cost will and is borne specifically by the State.
I live in San Diego County and have witnessed and read much of the expense to the California taxpayer. Its so surprising how many are so ill-informed


On Feb 06 02:12 PM Matthew Rafat wrote:

> To "devassocx": I don't claim to know exactly how much undocumented
> workers cost or add to California's finances. I was just pointing
> out that a reasonable analysis of the net gain or loss of undocumented
> workers must include the children of these undocumented workers and
> their future contributions. For me, the turning point is the reality
> of the situation--it would be nearly impossible to collect all the
> undocumented workers and deport them to Canada, Mexico, etc. Once
> I realized this, I started to focus more on how to make the children
> of undocumented workers productive, taxpaying residents.

Feb 07 06:57 PM

[Mad Hedge F...:]

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 05:32 PM