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By Miriam Sjoblom, CFA | 07-16-2009 01:43 PM

Why California Will Avoid Default on Its Debt

Franklin Templeton muni co-director Rafael Costas says the very high long-term cost of funding that California would suffer after a default will keep the state paying on its current obligations.

Securities mentioned in this video
FKTFX Franklin CA Tax-Free Income A

Miriam Sjoblom: Hello, I'm Miriam Sjoblom, a mutual fund analyst at Morningstar. Joining me today from Franklin Templeton's headquarters in San Mateo, Calif., is Rafael Costas, who is the co-director of the municipal bond team there. Thanks for joining us today, Rafael.

Rafael Costas: Our pleasure, Miriam. Thanks for having us on your show.

Sjoblom: Well, your team runs several California muni funds, including one of the oldest and biggest muni mutual funds, which is Franklin California Tax-Free Income. So, the topic that is most on our minds today is California and its budget crisis. The state is facing a $26 billion budget deficit that lawmakers haven't yet managed to close. The state took the step of issuing IOUs to some vendors just a few weeks ago. Budget problems certainly aren't new to the state of California, but things definitely seem worse this time. What's gone wrong here, Rafael?

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