PUTTING CALIFORNIA IN ITS PLACE
Thanks to Newsweek's July 28th cover story, "California in
Crisis," the Golden State's political and economic problems
are no longer a secret.
Since last Thursday, when Standard & Poor's cut its credit rating
on California General Obligation bonds from A to BBB, we have been
inundated with e-mails from our west coast clients asking if they
should dump their California bond holdings.
A Buying Opportunity
We think California residents should be buying, not selling. The
yield on California G.O.'s has risen by approximately 30 to 35 basis
points (from 5.00% to 5.35%) since the S&P downgrade. This means
bonds that were trading at 100.00 can now be purchased for about
95 cents on the dollar. To put this into perspective, long-term
insured California bonds are currently yielding approximately 5.00%.
California general obligation bonds are secured by the "full
faith and credit" of the state. This pledge is supported by
the state's "ad valorem" taxing power. Ad valorem taxes
are based on the assessed valuation of real property. California
boasts some of the most valuable real estate in the country.
According to the state constitution, G.O. debt service is the second
charge to the General Fund after monies earmarked for the support
of the public school system and public institutions of higher education.
Theoretically, this means bondholders will be paid before any other
public purpose - including the governor's salary. Current political
machinations aside, this makes California State G.O.'s an extremely
secure investment.
The Right Perspective
These important facts are being obscured by the adverse publicity
attendant to the political stalemate with regard to the state budget,
along with the upcoming recall vote in October.
By the way, according to Moody's Investor's Service, California
is not close to having the highest per capita debt burden among
the states. In fact, it ranks number 19.
We are old enough to remember the New York City crisis in the early
'70s. After the panic selling stopped and the smoke cleared, it
turned out that the astute investors were buying, not selling. It
should also be noted that the New York crisis was considerably more
dire than the fiscal problems in California today.
07/29/03
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