California’s credit rating has been downgraded. On Monday, Fitch Ratings cut the state’s long-term general obligation bond rating by two notches to BBB from A1. The drop was attributed to the state’s failure to come up with a timely budget and to the state’s severe fiscal crisis. Governor Schwarzenegger says the downgrade underscores the urgency to solve the entire deficit and all sides must come to the table to balance the budget immediately. Schwarzenegger declared a fiscal emergency and ordered state offices closed three days a month to save money as state officials plan to pay bills with IOUs starting Thursday.

School officials in Califorenia, North Carolina, Oregon, Florida and other states have also cut or limited summer classes. Pennsylvania schools still don’t know how much state money they’ll receive and may have to reopen their budgets to add or subtract spending. The state’s budget year began Wednesday with no sign of a deal between lawmakers and Gov. Ed Rendell. Ohio Gov. Ted Strickland and lawmakers are stymied over a proposal to allow casino-style gambling to raise money. As a result, the state started its budget year with a one-week temporary budget.

“The ongoing decline in tax receipts has worsened state budget problems. At least 48 states addressed or are facing shortfalls in their budgets for the upcoming year totaling $166 billion or 24 percent of state budgets. New data show a majority of states expect shortfalls in 2011 as well. Aggregate gaps through 2011 likely will exceed $350 billion.” According to cbpp.org.

Today, Ron DeLegge from etfguide wrote an article on how this growing crisis will effect your municipal bonds, and specifically, the effect on the munibond ETF’s. In Ron’s first example, iShares S&P National Municipal Bond Fund (MUB), the effect of the California downgrading is apparent. Ron states, “With $1.2 billion in assets, MUB is one of the largest munibond ETFs. The fund’s performance and yield is linked to the S&P National Municipal Bond Index which is comprised of municipal bonds from U.S. state, city and local governments.

In order to be included within the fund’s index, bonds must have minimum rating of BBB- by Standard & Poor’s, Baa3 by Moody’s, or BBB- by Fitch. Each bond is denominated in U.S. Dollars and must have no less than $50 million in outstanding par amount. This index is market value weighted and holdings are updated on the last business day of each month. Munis from Puerto Rico, Guam, and U.S. Virgin Island territories are also included.”

The story dives into 5 different ETF’s including the SPDR Barclays Capital California Municipal Bond ETF (CXA) and is a good read.

Find the whole story: HERE

TABLE 1: STATES WITH PROJECTED FY2010 BUDGET GAPS
	FY2010 pre-budget	FY2010 mid year gap	FY2010 Total	FY2010 Total – % of Budget
Alabama	$1.2 billion	0	$1.2 billion	16.7%
Alaska	$1.3 billion	0	$1.3 billion	30.0%
Arizona	$4.0 billion	0	$4.0 billion	41.1%
Arkansas	$146 million	0	$146 million	3.2%
California*	$34.2 billion	$19.5 billion	$53.7 billion	58.2%
Colorado	$1.0 billion	$384 million	$1.4 billion	18.6%
Connecticut	$4.1 billion	0	$4.1 billion	23.2%
Delaware	$557 million	0	$557 million	17.6%
District of Columbia	$650 million	$150 million	$800 million	12.7%
Florida	$5.9 billion	0	$5.9 billion	22.8%
Georgia	$3.1 billion	$750 million	$3.9 billion	22.3%
Hawaii	$682 million	$297 million	$978 million	19.1%
Idaho	$411 million	0	$411 million	16.4%
Illinois	$9.2 billion	0	$9.2 billion	33.0%
Indiana	$1.1 billion	0	$1.1 billion	7.5%
Iowa	$779 million	0	$779 million	13.2%
Kansas	$1.4 billion	Yes, DK size	$1.4 billion	22.6%
Kentucky	0	$1.1 billion	$1.1 billion	11.3%
Louisiana	$1.8 billion	0	$1.8 billion	21.6%
Maine	$640 million	0	$640 million	21.4%
Maryland	$1.9 billion	Yes, DK size	$1.9 billion	13.6%
Massachusetts	$5.0 billion	0	$5.0 billion	17.9%
Michigan	$2.4 billion	0	$2.4 billion	12.0%
Minnesota	$3.2 billion	0	$3.2 billion	21.0%
Mississippi	$480 million	0	$480 million	9.6%
Missouri	$923 million	0	$923 million	10.3%
Nebraska	$150 million	0	$150 million	4.3%
Nevada	$1.2 billion	0	$1.2 billion	37.8%
New Hampshire	$250 million	0	$250 million	16.2%
New Jersey	$8.8 billion	0	$8.8 billion	29.9%
New Mexico	$345 million	0	$345 million	6.3%
New York	$17.9 billion	0	$17.9 billion	32.3%
North Carolina	$4.6 billion	0	$4.6 billion	21.9%
Ohio	$3.3 billion	0	$3.3 billion	12.3%
Oklahoma	$600 million	0	$600 million	10.5%
Oregon*	0	0	0	0.0%
Pennsylvania	$4.8 billion	0	$4.8 billion	18.0%
Rhode Island	$590 million	0	$590 million	19.2%
South Carolina	$725 million	0	$725 million	12.5%
South Dakota	$32 million	0	$32 million	2.9%
Tennessee	$1.0 billion	0	$1.0 billion	9.7%
Texas	$3.5 billion	0	$3.5 billion	9.5%
Utah	$721 million	$279 million	$1.0 billion	19.8%
Vermont	$278 million	0	$278 million	24.8%
Virginia	$1.8 billion	Yes, DK size	$1.8 billion	10.9%
Washington	$3.4 billion	$195 million	$3.6 billion	23.3%
West Virginia	$200 million	0	$200 million	5.3%
Wisconsin	$3.2 billion	0	$3.2 billion	23.2%
Wyoming	0	$32 million	$32 million	1.7%
Total	$143.2 billion	$22.7 billion	$165.9 billion	24.4%

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4. Municipal Debt: Did My Bonds Go Down The Sewer?

MUB, NYF, NYSE:CXA, PRB, PVI