California is on a course to de facto bankruptcy, when it will run out of cash to pay its bills. It’s just a matter of time unless the legislature enacts structural budget reforms and brings the cost of government down to match the tax revenues that residents are willing to pay (before they move to another state.) California bonds are starting to turn into a Ponzi scheme where cash from new investors is used to pay the interest on existing bonds. That can’t continue much longer because investors will soon see an unacceptable risk of taking a haircut on principle repayment and will stop buying CA bonds at any kind of reasonable interest rate. My view is that CA muni bonds are already junk bonds and should have been downgraded below investment grade by now.
I know that the state’s constitution says that interest and principle on bonds has to be paid first before all other priorities, but in a de facto bankruptcy I think there is a real possibility that teacher’s unions and other groups could sue in federal court to invalidate that part of the CA constitution. Proposition 8 is now part of the CA constitution (if I recall correctly), and it was just struck down by a federal judge, so why couldn’t a liberal federal judge also invalidate the language in the constitution that says bond payments must be made first? I think that’s possible in our crazy legal system—all it takes is a liberal judge to say that paying those rich bond holders first is too much of a hardship on the school children and state workers.
I wouldn’t invest a dime in California muni bonds now. I’d much rather buy lower-rated corporate bonds that should actually be rated above CA munis. This fiscal disaster in CA is a classic example of numerous groups of people putting their short-term political and economic interests ahead of the long-term economic health of their state. Salaries, wages, and benefits for state and municipal workers and the numbers of those workers all have to be reduced to balance the budget. If that doesn’t happen the state will eventually reach de facto bankruptcy and be unable to keep schools and other basic services running and that’s when the middle class flight out of California will really shift into high gear, resulting in a complete economic collapse in CA. The governor would then have to deploy the national guard to maintain order and CA would probably become a ward of the federal government as Washington would finally be forced to step in and fund basic services (utilities, police, and fire fighters) while finally trimming back the bloated cost of state and local government. I’d hate to see that happen but this is the course that California is on right now.
Some times there are long posts on here that I don’t find interesting and don’t take the time to read.
Your’s, however, was quite interesting and I read every word. Enjoyed your perspective and comments.
Exponential numbers just don’t lie. Like your post. Thanks