California Municipal Bonds - Are California Municipal Bonds Worth Investing In?

The California municipal bonds - or any other municipal bonds issued by the other 49 states, for that matter - are among the very few tax shelters left where the high net worth individual investors and institutional investors are concerned. Keep in mind that these are exempt from taxes on the federal level as well as on certain tax items on the state and municipal levels, thus, their popularity.

Trouble in Paradise

But in the face of the fiscal troubles hounding the State of California and its political instrumentalities from the county to the city levels, many investors are now having second thoughts. It must be noted that California is one of the states hardest-hit by the Great Recession with a fiscal deficit running into the $40 billion in 2008 alone. It became so severe in the following year that the state faced insolvency, thus, leaving significant doubts as to the state's ability to repay its California municipal bonds due for the succeeding years.

As then-Governor Arnold Schwarzenegger famously said in June 2009:

"Our wallet is empty, our bank is closed and our credit is dried up."

There was, indeed, trouble in paradise. Massive budget cuts amounting to $24 billion were proposed, which represented a quarter of California's total budget for the fiscal year. Other signs that pointed to the state' troubled finances included layoffs of state workers.

Silver Lining in the Stormy Clouds

But this is California we are talking about - a state that has and will continue to defy expectations, be it low or high. If the bonds were issued by a multinational corporation, the investors would have ran the other way for the justifiable fear of not being paid for the principal plus interest due on the bonds.

But the California municipal bonds have even set a record for one of the highest municipal bond sales in recent history. And if the contrast between the state fiscal crisis and the rise in sales of municipal bonds is insufficient to make any investor confused, credit rating agencies even gave higher ratings for California!

Well, of course, the facts that the credit rating agencies reevaluated their rating system and the municipal bonds are held to different criteria had a hand in such a confusing state. But still, the rise in three notches for California's credit rating is a silver lining in an otherwise stormy situation for the state's fiscal crisis and, consequently, for the issued and soon-to-be-issued California municipal bonds.

Almost Iron-Clad Guarantees

And then there is also the state's constitutional mandate where the bond holders of the state's municipal bonds are second in line to payments from tax receipts - primary education comes first. This constitutional guarantee suffices for most investors who may have had doubts about the state's willingness to pay the amounts due when the maturity date rolls around.

Plus, if you think about it, the federal government is under moral and legal obligation to bailout any state that goes under, so to speak. If it can bail out the large banks whose managements were incompetent, to say the least, to steer their companies toward a profitable course, then what reason on Earth is there for the government not to do the same for one of its states?

So, to answer the question in the title, yes, California municipal bonds are still worth investing in for the abovementioned reasons.