What Happens When California Defaults?

[Sam Spade]

For now the feds will bail them out, I suspect.  Arnold's already gone out with hat in hand a couple of days ago (need to find article).

But I haven't seen any evidence that their sales/income tax receipts are increasing, much less stabilizing.  In fact, recent numbers have continued to decline and, as far as I can tell, the curve is nowhere near turning (once again, will need to pull up data).

FWIW, a California default is an event that would probably cause greater problems than Lehman, given the impact California has on the world economy.

[Sam Spade]

We apply for bankrupcy?

States cannot file bankruptcy.

[Sam Spade]

Suffice it to say, I exited from California state and local muni obligations a few months ago. I chose to pay the state income tax on muni obligations from elsewhere, or at least in a Muni fund, which  has a small percentage of California issues.

I would stay away from California munis, but also any munis in general where I cannot validate the solidness of their financial footing.  And, quite frankly, that's a lot of them out there.  Examine the tax receipts and you would agree.

And I say that recognizing their tax advantages if nothing goes wrong...

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We're closer than you might imagine - that's where the writer of the article is correct.  The thing is, the Feds will continue to bail them (and everyone else) out until they are no longer able to (or are unwilling - I consider that low probability given what's gone on so far).