Municipal Bond Forum
Protections in place for California munis
Q
I am a large holder of California general obligation bonds, which continue to drift down in price. I understand they are obligated by constitutional mandate to pay, but we are seeing many heretofore unheard of events lately. Should I remain confident in the state’s obligation, given the Legislature’s inability to make headway on this huge projected shortfall?
A
James A. Klotz responds:
California continues to experience financial difficulties related to current economic conditions. Still, the state represents a very broad and diverse economy that can be counted upon to provide sufficient revenues to meet debt service on state related obligations.
As you rightly point out, there are strong constitutional protections in place for state issued bonds. While the state’s fiscal news has been of great concern recently, we still believe California’s commitments to meet debt service requirements in a timely manner are very strong. Gridlock in Sacramento between the governor and Legislature has exacerbated the state’s revenue shortfalls, and the state continues to have the wherewithal to meet its obligations.
While we cannot predict the future, especially in these unprecedented financially troubled times, it would be cataclysmically damaging for California to fail to pay its bonds and face the consequences that would ensue.
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