How Soon Will California Default?

California Creditors Dread IOUs With Aid Plea Failing (Update2)

By Edwin Chen, John McCormick and Michael Marois

Jan. 13 (Bloomberg) -- California’s hopes are fading for federal help in closing a projected $19.9 billion deficit that has caused the lowest-rated state’s borrowing costs to rise 24 percent since September.

We recognize they have enormous problems,” David Axelrod, senior adviser to President Barack Obama, said in an interview. “But we can’t solve all of those problems from Washington.”

Investors are growing more concerned that California, the world’s eighth-largest economy, will repeat last year’s fiscal crisis that forced it to use IOUs to pay bills. With Governor Arnold Schwarzenegger seeking $6.9 billion in federal assistance to narrow the deficit, the extra yield paid on the state’s 10- year bonds over AAA-rated municipal securities rose to 1.31 percentage points yesterday from 1.06 points on Sept. 11, according to Bloomberg fair market value index data.

Schwarzenegger’s plea for help may become a test case for Obama, who last year called the 62-year-old Republican governor “an outstanding partner with our administration.” Dozens of states face budget shortfalls amid the worst recession since the Great Depression, and at least 36 have already reduced fiscal 2010 expenditures, according to the National Association of State Budget Officers.

‘Huge’ Concern

“There’s a huge amount of concern about California,” said Howard Cure, who helps handle municipal-bond investments for Evercore Wealth Management in New York, which oversees $1.5 billion. “There’s a relatively large reliance on hoping that the federal government will send extra money their way. It’s going to be very politically difficult for that to happen.”

Schwarzenegger will visit Washington next week to make his case to members of the Obama administration and California’s congressional delegation, the governor’s press secretary, Aaron McLear, said today. He didn’t say if Schwarzenegger had requested a meeting with the Democratic president.

The governor wants Obama to reduce required programs, waive rules and provide additional funding. In recent days, Schwarzenegger stepped up his campaign for “fairness,” focusing much of his Jan. 6 State of the State speech and Jan. 8 budget address on appeals for a greater share of federal money.

“It is unfair the way the money is being distributed right now,” he said on NBC’s “Meet the Press” on Jan. 10.

“The federal government is forcing us to spend money we don’t have,” Schwarzenegger said in the speech outlining his $82.9 billion spending plan for the fiscal year beginning July 1, speaking of education requirements and costs associated with detaining undocumented immigrants.

Home Foreclosures

California, whose economic output is greater than that of Russia, may be in the greatest need of any state. It recorded the third-highest rate of home foreclosures in November, behind Nevada and Florida. November’s unemployment rate in California was 12.3 percent; the national average is 10 percent.

The Golden State’s general-obligation debt rating from Moody’s Investors Service is Baa1, the eighth-highest investment grade. Standard & Poor’s today cut its rating on California’s debt to A-, the seventh-highest, from A. Greece, the poorest rated member of the 16-nation Euro region, is ranked two steps higher at A2 by Moody’s and one lower at BBB+ by S&P.

An S&P/Investortools index of California state and local debt returned 13.2 percent in 2009, 1.4 percentage points less than the national average.

Higher Yields

Mounting deficits are forcing California taxpayers to pay higher interest. The state’s 10-year bonds yielded 4.6 percent on Jan. 11, up from 4 percent on Sept. 30, according to Bloomberg indexes.

Average 10-year municipal tax-exempt security yields were 81 percent of those on U.S. Treasuries of comparable maturity on Jan. 11, according to a Municipal Market Advisors index. California’s obligations yielded about 0.9 percentage points more than the federal debt.

Schwarzenegger’s budget “relies on a substantial amount of federal funding that is unlikely to come,” said David Blair, municipal bond analyst at Pacific Investment Management Co. in Newport Beach, California, which oversees $24 billion in local- government debt. “This budget isn’t anywhere near providing a solution.”

California’s current budget, approved in July, includes about $8 billion in federal stimulus money.


Why do we continue to see such resistance to spending cuts?
Arnold, you are quickly running out of time to address the structural deficit problem, and the bond market will not be patient for much longer.


  1. LOL, love the URL for this site. I think CA is whistling past the graveyard, and whistling loudly.

    California is my birth state, though I haven't lived there for about 3 years now. The state politics are completely locked up with partisanship. Some of the electorate have pushed for ranked-choice voting but to no avail. Ranked choice voting let's you say you'd like Mr. A as your first choice, but if he's eliminated, then you'd like Mr. B, and so on.

    All ballots are tallied for all first choices. Lowest candidate gets dropped, and those ballots are reviewed for the voter's second choice candidate, and so forth until you have a true representation of the electorates will.

    Since this system would allow a 3rd party candidate or independent to receive votes without voters "wasting" their ballot, the 2 dominant political parties are strongly opposed to ranked-choice voting. Thus, the cycle of highly charged partisan politics continues.


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