California On The Brink

The coming default of California will be the start of the next phase of the world financial meltdown. California's economy is the eighth largest in the world. A downgrade of the state's debt is all but assured making it difficult or impossible for the state to raise money in the municipal bond market. I would be a seller of all municipal bonds issued by the state of California as well as every city and municipality. California's insolvency will have a broad negative effect on the entire U.S. economy. Other states are sure to follow as both income and sales tax revenues are down as much as 30%. New York (what a circus that state government is) and New Jersey will not be far behind California. Be very careful if you own municipal bonds, the default rate is going to soar in the months to come.-Lou

California set to issue IOUs as fiscal crisis weighs

LOS ANGELES/NEW YORK (Reuters) - California's controller said on Wednesday that he would have to issue IOUs in a week if lawmakers can't quickly solve a $24 billion budget deficit, and the state's treasurer plans to tap a reserve fund to meet debt service costs.

The measures came as a budget crisis deepened in the most populous U.S. state and the gridlocked legislature failed to pass a proposed $11 billion in cuts.

"Next Wednesday we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression," Controller John Chiang said in a statement announcing that he would be forced to use IOUs to pay the state's bills beginning on July 2.

"The state's $2.8 billion cash shortage in July grows to $6.5 billion in September and after that we see a double digit freefall," Chiang said. "Unfortunately, the state's inability to balance its checkbook will now mean short-changing taxpayers, local governments and

small businesses."
State Treasurer Bill Lockyer, meanwhile, is planning to draw on reserves for economic recovery sales tax bonds, according to a spokesman.

Rating agency Standard & Poor's warned it may downgrade the bonds, given the problems California is likely to face in replenishing its emergency funds.

The state is expecting to file a material event notice on Thursday to alert bondholders to the move that comes in response to plunging sales tax receipts, said spokesman Tom Dresslar.
"The senior coverage account will be drawn on and debt service on all economic recovery bonds will be paid in full on July 1," Dresslar said.

California has been in crisis since the housing slump and credit crunch caused a severe decline in revenues. The state has seen its unemployment rate climb steadily to 11.5 percent in May from 6.8 percent a year earlier, according to labor department data.

LAWMAKERS REJECT CUTS

The government dipped into the same reserve fund in December to make a principal payment on economic recovery bonds, but was able to top the reserve back up within days.
The California Legislature on Wednesday voted down $11 billion in proposed cuts to state

MORE