Bond Rating for the State of California During the Fiscal Crisis

Question

  1. During the fiscal crisis of 2008, the economies of many states were adversely affected, but the state of California fared worse. Bond rating firms lowered California’s bond rating to junk bond status. Using the criteria used by any of the three bond rating firms, what factors did bond raters consider  to determine California’s low bond rating?

 

  1. What is the current bond rating for the state of california? What factors has California improved to merit the new rating?

 

  1. California is different. When a state is this big in terms of both population and wealth, should it even be required to have a balanced annual budget? Would it have made a difference if California had to balance its budget, say, every second or third year, and have the budget focus instead on ensuring that the deficit stayed below a fixed percentage of state wealth ( as in the European Union, the deficits of whose members are required not to exceed 3 percent of gross domestic product).

 

  1. California relies heavily on state income tax for her revenues, but there have been criticisms on this heavy reliance. Is this criticism justified, and should California seek other revenue sources? Explain.

Answer

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