California Furthers Its Financial Issues: Debt Downgraded

Just what we need--more difficulty in getting out of a terrible $20 billion deficit. Standard & Poors' recent downgrade puts general obligation bonds 7 notches down from the coveted AAA rating to an A-. The state already had the lowest rating in the Union and as the credit crisis ran its course things got worse. California will now have to pay a slightly higher interest rate on new and refinanced debt, exacerbating the state's budget crisis. It's a downward spiral that has just begun; hopefully with enough cuts in spending and fiscal conservatism we will see the $20 billion gap close going forward. Tax revenues have declined in the wake of the real estate bubble bursting which caused unemployment to rise (the states biggest source of revenue is taxes on employed individuals as well as businesses).

Investment opportunities abound in the municipal bond market. A 30 year California bond now yields 7.7%, and that's after taxes (muni bond interest is usually not taxable by the federal government and if you reside in the state that pays interest on the bond, the state tax is also usually exempted). For a more in-depth look at California muni bonds check with your local investment advisor, as this is general information and your situation may differ.