Junk bond territory

by CalWatchdog Staff | January 14, 2010 5:43 pm

California’s dysfunctional government yesterday saw its bond rating drop[1] again:

Jan. 14 (Bloomberg) — California bondholders got an early glimpse of what the state’s budget-negotiation season may bring as a looming $20 billion deficit led Standard & Poor’s to cut its credit rating for the second time in less than a year.

S&P yesterday lowered its assessment on $64 billion of the most-populous U.S. state’s general obligation bonds one level to A-, four steps above speculative grade, saying a plan by Governor Arnold Schwarzenegger to erase the spending gap relies too much on proposals that may not succeed.

“Speculative grade” means junk bonds.

S&P itself wrote in its analysis[2]:

The rating actions reflect our view of the state’s credit quality in light of its severe fiscal imbalance and the impending recurrence of a cash deficiency if the state’s revenue and spending trajectories continue.

It’s also worth pointing out that the state should not even borrow money for anything except capital expenditures that bring in money, such as roads (paid for with gas taxes) or water (your water bill). But the state has run up tens of billions of dollars on the taxpayers’ credit cards for such non-revenue-producing areas as stem-cell research, parks, and a high-speed train[3] that will never pay for itself.

The governor was elected in 2003 by “da people,” as he annoyingly still calls us, to stop such profligacy, but he only made matters worse.

– John Seiler

  1. bond rating drop: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a_xUtU9ckIbg
  2. its analysis: http://www.istockanalyst.com/article/viewarticle/articleid/3780532
  3. high-speed train: http://jeffnolan.com/wp/2008/10/26/vote-no-on-california-bond-measures/

Source URL: https://calwatchdog.com/2010/01/14/junk-bond-territory/