The parallel between California’s debt problems and those of Greece isn’t hard to notice. One thing California has going for it, though, to the relief of California municipal bond ETF holders: the state isn’t expected to default anytime soon.
On May 14, Gov, Arnold Schwarzenegger updated his rather tight budget proposal to the legislature, according to The Economist. Despite the fact that after being adjusted for inflation and population growth, it’s smaller than ever, California still faces a budget deficit of around $17.9 billion in the current and coming fiscal years.
The governor is now reduced to eliminating state programs such as the welfare-to-work program, cash assistance to poor families with children, most state-subsidized child care and more. The governor is also castigating the over-generous state employee pensions, which is costing California more than $6 billion this year, or the equivalent of the programs being eliminated.
The pensions signal that spending could always outpace revenues in the long-term. So, while California may not default now, it may spell trouble later for one of the world’s largest economies and the municipal bonds it issues. For now, though, the ETFs listed below are up year-to-date and are sitting above their long-term trend lines (the 200-day moving average).
- PowerShares Insured California Muni Bond (PWZ)
- SPDR Barclays Capital California Muni Bond (CXA)
- iShares S&P California Municipal Bond (CMF)
Max Chen contributed to this article.