Tuesday, July 7, 2009

Why Is California Rated BBB?

The fact that Fitch was the only major ratings agency to action with regards to California's general obligation bonds is almost as perplexing as the fact that BBB was the specific rating chosen by that agency. Although we haven't had a chance to peruse the Excel sheets behind this determination, there are several sad realities concerning California that, frankly, won't be going away anytime soon. These realities, when considered in totality, cause us to pose the question: Where will the revenue come from?

It is estimated that 3000 people are leaving California every day; especially relevant due to the State's heavy reliance on personal income tax revenue - 55% of the revenue pie to be exact. More importantly, 45% of that 55%, or 24.75% of all revenue that California exacts, is extracted from those in the highest income brackets. If you don't believe that wealthy individuals establish residency in a State based upon it's taxation policies, then you don't know any wealthy individuals. In a recessionary environment, migration of the wealthy from California should accelerate. As a bit of trivia, this whole dilemma was born out of Proposition 13 (1978), an ill-conceived ballot initiative that placed a upper limit on property taxes. The result is that, while most States derive revenue equally across property, sales, and income taxes, California is stuck relying on the fickle income tax.

The handicap listed above would be surmountable if the State was able to adjust it's spending in recessions to balance it's budgets. The problem is, it can't. The result is the well-known ~$24B budget shortfall, complemented by the recent issuance of fiat currency: the IOU's. This additional handicap would be surmountable if major financial institutions would accept the IOU's. The problem is, they won't.

California is out of money, it's revenue sources are moving away from the State, and nobody is buying the IOU Ponzi-scheme. We predict the situation will end in disaster; the resolving of which can only be accomplished by throwing the entire State Constitution in the trash and creating a new one - preferably one not full of inherent structural deficiencies. Bottom line: California's debts will need to be restructured to accommodate a new, leaner California. So why are those debts rated BBB? Sphere: Related Content

No comments:

Post a Comment