Alert May 26, 2011

Governor's Revised Budget No Help to California's Shrinking Bond Market

California Governor Jerry Brown released his revised State budget earlier this month.  Under the proposal, Governor Brown plans to reduce general obligation bond sales by approximately 60%.  Some municipal finance analysts argue that the Governor’s efforts to mitigate the State’s mounting debt and to raise the State’s credit rating through curtailing California bond sales may further tighten yield spreads for California securities, but also prompt investors to search for alternative investments in an already supply-constrained market.

The Governor’s original budget, delivered in January of this year, projected a $25.4 billion deficit for fiscal year 2011-12, and proposed a combination of spending cuts and tax extensions as a remedy.  Many of the Governor’s proposed spending cuts have been adopted by the California Legislature, and additional tax receipts of $2.5 billion are expected, thus leaving a revised budget deficit of $9.6 billion.  Balancing of the budget, however, still remains dependent on the Governor obtaining legislative and voter approval to extend several expiring taxes. According to the Governor, without the tax extensions, additional cuts to State spending must occur.