California Muni Bonds - Is The Reward Worth The Risk? (Part 2)

California holds a special place in the United States. With

, California comprises

. It is the headquarters for house-hold names like Apple, Inc.

, Google

, Intel

, Gap

, The Walt Disney Company

, and home of the Silicon Valley, the hot zone for high-tech startups, and Hollywood, home of the movie industry. A lesser known fact is that it is also the home of major subprime lenders such as Countrywide Financial, Ameriquest Mortgage, etc. In a sense, Apple and Countrywide are both innovators who did a fantastic job pushing their products to users, although one redefined the smart-phone industry and tablet computing, while the other devastated the financial lives of many. California, like the US, has a budget problem. During good times, it pretended that surpluses would be forever, but once the downturn came, tax and other revenue couldn't cover the expenses anymore, and it was handed a large deficit. However, unlike the US government, California does not have a printing press, and it must also have a balanced budget. Also, California and its many cities have a serious pension problem, as their pension programs often have unrealistic return assumption, and funds get depleted at an alarming rate. Indeed, many of California's problems are structural, and are not easy to solve. However, with every crisis comes opportunity, and California may just get a break in the near-term. Since elected governor of California, Gerry Brown had made balancing the budget his top priority. He had since made progress, through making some unpopular choices in cutting many programs and laying off many state employees, and proposed to extend the increase in DMV fees. His biggest proposal is to have voters vote to

, which would help to raise $12 billion in revenue, although this is currently not supported by the Republicans and the outcome is uncertain. Revenue wise, California recently reported that it had an

. This is certainly good news for the budget, and we believe that more good news will come. One of the reasons, of course, came from the story of a very successful

. When Google went IPO in 2006, personal income tax collections in California

. While not all the increase was due to Google, the tech giant certainly contributed to it, as windfalls for its employees and investors created windfalls for California as well. In 2011, other than LinkedIn, many successful IPOs such as ServiceSource International

, Responsys

, Cornerstone OnDemand

, etc. are all California companies. Many others have also filed, or likely to file, for IPO soon, such as Pandora Media, Zynga, Yelp, etc. Of course, the mother ship of all technology IPOs, Facebook, already with an estimated $50 billion market capitalization, will likely file for IPO next year. All these IPOs will continue to create windfalls for its investors and employees, and also California. The IPOs of these companies also ignited further capital infusion and hiring in the IT sector, and thus help California's general economy as well. With tax revenue getting a boost from all the technology IPOs, California should be getting a break in this year and the following year. They may not solve all the near-term problems, and certainly none of the structural problems, they nonetheless provide a psychological boost for investors if they see short term revitalization of California's economy. While readers might say that investors will see through this, they might want to consider how Euro got a boost each time when the PIIGS problems just got kicked down the road. In part 3, we will examine the type of instruments for investing in California municipal bonds, and also their current yields and risks.