Californians' appetite for bonds will serve new governor well.

There's good news for California Gov. Arnold Schwarzenegger: More municipal bond investors live in his state than in any other in the nation.

Of the 4,536,236 taxpayers who said they received tax-exempt interest in 2001 (that's right, only 4.5 million people), 554,649 were from California, according to the latest edition of the Internal Revenue Service's Statistics of Income Bulletin. And they said they got $8.4 billion in tax-exempt interest.

New Yorkers came in second place, with 419,012 claiming $7 billion, followed by Florida, with 307,050 claiming $6 billion. No other states came close. A total of $58 billion in tax-exempt interest was paid out.

Schwarzenegger will need every last one of those investors as he asks voters to approve $15 billion in bonds this March to help cure the state's budget deficit. Two-thirds of the legislature must approve the measure by Dec. 5 in order to place the bond issue on the March ballot.

That 554,649 figure probably increased in 2002, because, while stocks went down in 2001, pundits only talked of "capitulation"--the point at which investors throw in the towel--during the summer of 2002. Wall Street reported record demand from individuals for municipal bonds, the investment of choice for those interested in preservation of capital, that summer. California's $15 billion municipal bond issue would be the biggest one ever. The proceeds would be used to repay $14 billion in short-term debt coming due in June, and make a dent in the $14 billion deficit the state faces this year.

That $15 billion borrowing sounds almost unseemly when you consider that the entire market--the 15,000 or so municipal issuers that sell bonds every year--has sold an average of $241 billion annually over the last decade.

The state can afford it. California is the world's sixth--largest economy, in terms of gross domestic product, after the U.S., Japan, Germany, the United Kingdom and France. In terms of net, tax-supported debt per capita, California ranks 19th among all the states, well behind Connecticut, Massachusetts and Hawaii, which are the top three, according to Moody's Investors Service's latest State Debt Medians survey. The Golden State has sold more bonds since Moody's did its original calculations, but it probably didn't move up in the rankings very much. For all 50 states, median net tax-supported debt as a percentage of personal income is 2.2 percent. California's is 2.5 percent; New York's is 5.9 percent.

"They can handle the debt, there's no question of that," said David Hitchcock, an analyst at Standard & Poor's in New York, which rates California BBB. "The question is the trend. You want to see them wean themselves away from the addiction of borrowing to cover operating deficits, and whittle down that structural deficit."

That California is going to sell lots and lots of bonds isn't news. When the state Assembly finally passed what it called a budget back in July, it included $10.7 billion in bonds to help cover the state's deficit, $2.2 billion in pension obligation bonds and $1.5 billion in bonds backed by the state's share of the tobacco settlement.

The budget also included a built-in deficit for the next fiscal year of $8 billion, which climbed to $10 billion, and then to $14 billion after the new governor made good on his campaign promise to roll back the car registration tax increase, according to Legislative analyst Elizabeth Hill.

Both the deficit and pension bonds are being challenged in court. Schwarzenegger wants to bring his case for deficit bonds right to the people. The people, it will be remembered, gave him a mandate before.

In his inauguration address, the new governor said, "I will not rest until our fiscal house is in order." There will be a lot of sleepless nights in Sacramento.