California municipal bond ETFs (CMF) sold off last week, as did the National muni-bond ETF (MUB). Muni-bond credit risk and perhaps interest rate risk is being re-priced. This action wasn't a surprise (tax-base/pension fund update 10/26, California Comptroller on 8/20 and Meredith Whitney said States may need a Federal bailout in 12-months on 9/30/2010). California is in process of selling $10 billion of short-term notes.
"In two days limited to retail sales, the $5.89 billion in orders included $822.7 million of notes maturing in May, with yields quoted at 1.25 percent, and $5.07 billion that mature in June at 1.5 percent, Tom Dresslar, spokesman for Treasurer Bill Lockyer, said yesterday by e-mail. Institutional investors will be offered the securities today, and final prices will be set." [Bloomberg]
Below is part of the executive summary and a video with California's Legislative Analyst, Mac Taylor, discussing the report. Hat tip Business Insider.
$25 Billion Budget Problem Needs to Be Addressed in Coming Months
Our forecast of California’s General Fund revenues and expenditures shows that the state must address a budget problem of $25.4 billion between now and the time the Legislature enacts a 2011–12 state budget plan. The budget problem consists of a $6 billion projected deficit for 2010–11 and a $19 billion gap between projected revenues and spending in 2011–12.
2010–11 Deficit. We assume that the state will be unable to secure around $3.5 billion of budgeted federal funding in 2010–11. This assumption is a major contributor to the $6 billion year–end deficit we project for 2010–11. We also project higher–than–budgeted costs in prisons and several other programs. In addition, our forecast assumes that passage of Proposition 22 will prevent the state from achieving about $800 million of budgeted solutions in 2010–11.
2011–12 Deficit. The temporary nature of most of the Legislature’s 2010 budget–balancing actions and the painfully slow economic recovery contribute to the $19 billion projected operating deficit in 2011–12. This gap is $2 billion less than we projected one year ago. Actions taken during the 2010–11 budget process to reduce Proposition 98 education spending are a major contributor to the decline.
Ongoing Annual Budget Problems of $20 Billion Persist
Similar to our forecast of one year ago, we project annual budget problems of about $20 billion each year through 2015–16. In 2012–13, when the state must repay its 2010 borrowing of local property tax revenues and the full effect of Propositions 22 and 26 hit the state’s bottom line, our forecast shows the operating deficit growing to $22.4 billion. Because our methodology generally assumes no cost–of–living adjustments, our projections probably understate the magnitude of the state’s fiscal problems during the forecast period."
**"Massive Liabilities Growing. Unfunded actuarial accrued liabilities in pension and retiree health funds for state employees, teachers, and university employees now total $136 billion. (Possible upcoming actions by the state’s two largest pension systems to lower their assumed annual rates of investment return would expand this number.) The California State Teachers’ Retirement System (CalSTRS) estimates that it needs billions of dollars more per year in contributions—not included in our forecast—to retire its unfunded liabilities within about 30 years and continue operations past the 2040s. Similarly, there are no funds assumed in our forecast to begin retiring the University of California Retirement Plan’s (UCRP) growing unfunded liabilities. State retiree health liabilities continue to grow, driving upward the associated General Fund expenditures. The Legislature took action earlier this year to modify state pension programs, providing some budget relief now and greater relief in the future. The unfunded liabilities of state retirement systems, however, loom over the state’s budget prospects. Left unaddressed in the near term, costs to service CalSTRS, UCRP, and retiree health liabilities will only grow, burdening future Californians more and more and requiring even harder decisions about taxes and services. The state should look for ways to address these problems soon, to avoid passing these huge obligations to future Californians."