Wednesday, August 9, 2017

State Finance 101

A word about state finance: An article in Bloomberg has the surprising headline "California, Once Compared to Greece, Is Now Trading Better Than AAA."* If you look at the article, you'll find that the theme is that while California bonds are not rated Triple A, their yield is close to bonds that are. So some traders think they are overpriced. The article attributes the premium on California bonds to the presence in the state of rich high-tech types who are attracted by the tax-free aspect of such securities. (Interest on the bonds is exempt from federal and state income tax).

Although we tend to focus on the state's General Fund and its condition, the state has myriad funds outside the General Fund that are earmarked for specific purposes. Some are small; others are large. For example, the gas tax goes into a fund that is used for road repair and other transportation-related activities. Ultimately, it's all cash in the state treasury, whether or not it's labeled "General Fund." The more available cash there is, the lower the perceived risk on state bonds. As the chart above shows, since the bottom of the Great Recession, the amount of "unused borrowable resources" that are available for the controller to tap has risen. Ultimately, that's the reason why California bond yields are low.

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