Information on California State Bonds
- Any bondholder of securities issued by the state, local governments, and agencies of California should review with their broker or other investment professional the exact purpose and security of the bonds they own. While most California bonds are exempt from federal taxes, some, particularly since 2005, have been issued as taxable bonds. It is important for investors to understand the exact income stream to repay bond issuance. Bonds are generally issued as general obligation bonds, commanding the full faith and credit of California. Revenue bonds have a specific stream of income from a specific tax or revenue and may also have a general obligation backing.
- While default risk is often talked about, the State of California does have large and important resources it could employ to end its deficit and restore fiscal balance. This will include cutting budgets and curtailing future growth of initiatives or ending programs altogether that cannot reasonably be expected to demonstrate concrete results. The ability to add taxes permanently to maintain existing programs is unlikely as the competitiveness of California business is already suspect due to high tax burdens. However, continuation of temporary taxes is in play until the fiscal crisis is resolved. Thus, bonds of large agencies and the state, while under pressure, continue to have resources to meet debt service, the timely payment of interest and principal.
- California will shift much of its debt burden to the state's local governments. Bondholders of specific cities and towns in California, as well as local agencies such as redevelopment agencies, school, water, sewer, and pollution control will be under greater stress than state bonds. This reflects the smaller size and status of many of these towns and the high level of unemployment that has lowered tax revenues. This directly impacts bondholders who now no longer have the same margin of cash flow or safety for their bonds. Concerned investors should contact the issuer of any bonds they own and learn what is the ratio of income to debt service currently. Bonds with ratings in the investment grade level should be able to continue regular debt-service requirements.
- Investors who are not California residents may consider selling their holdings as part of a trade into other municipal bonds from other states. However, investors may incur losses in doing so and may be investing in issuers that might have their own problems. Investors need to diligently research any new bond issues purchased in states with continuing budget deficits. Insured municipal bonds provide some level of assurance that additional reserves are available to maintain debt service but this requires an analysis of the insurance company guaranteeing the bond.