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California’s fiscal problems
Q
I would like to invest in municipal bonds to avoid paying taxes, but I live in California and am afraid to invest in California bonds right now because of California’s cuts, budget problems, etc. I’ve heard California’s priority in paying their interest on bonds comes second on their list. Also, I wonder about how well they’ll hold their value. Am I being foolish and missing out on the tax break? You mentioned Bush’s tax break will expire the end of this year; what incomes does it cover and who will be effected?
A
James A. Klotz responds:
The Bush tax cuts are scheduled to expire on December 31 of this year. The most likely outcome is that the tax cuts for at least the two highest brackets will be allowed to phase out. This will return the top rate to 39.6% from 35% and the second highest rate to 36% from 33%.
Your understanding about general obligation (GO) bonds issued by the state of California is correct. According to the state Constitution, only primary and secondary education funding takes precedence over debt service in the annual budget.
The link below will take you to an article written earlier this year by Dr. Jay Abrams, our Chief Municipal Credit Analyst, which expounds on some of your questions:
California: Strained yet Strong
Start here.
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