Monday, August 20, 2012

California Crashing

California’s July sales tax revenue crashed. Revenue from the tax was down 33.5% from the budget approved in late June, reports State Controller John Chaing.

According to Breitbart, even more ominously, the state’s $9.6 billion cash deficit that was rolled over from the June 30th fiscal year has catapulted to $18 billion last month.

The state has avoided default by temporarily borrowing from state trust funds, but those accounts will soon need their cash back to continue operating. Today California quickly began trying to sell $10 billion in municipal bonds to fund the record $28 billion they need to keep the lights on. With tax revenue plummeting and the state already the second lowest rated credit in the country, if the independent credit rating agencies downgrade the state to “junk bond", California will be short up to $18 billion and default.

It makes no sense to own any municipal bonds. Once the crisis heats up, whether its California or another state that goes into crisis first, panic is going to ensue in the municipal bond sector.