Meredith Whitney argues that States’ unfunded obligations threaten the economic recovery in her Wall Street Journal article “The Hidden State Financial Crisis.” Is she correct? While some experts dispute her analysis, people should remember that she called the subprime crisis in 2005 at a time when many of her counterparts scoffed. As she set them out, the essence of her current opinions are essentially as follows.
States have over $400 billion in state budget shortfalls.
Next month marks the end of the American Recovery and Reinvestment Act’s $480 billion in federal stimulus, which states have relied on for almost 30% of their budgets.
While state revenues have improved, they still remain at roughly 2006 levels.
Over the past 10 years, state and local government spending has grown by 65%, while tax receipts have grown only by 32%.
Off balance sheet debt (pension and other retirement benefits) totals over $1.3 trillion, and accounts for almost 75% of taxpayer-supported state debt obligations.
Fixed debt-service costs are increasingly burdening state monies for essential services, especially social services.
Individuals and corporations will migrate to more tax-friendly states.
Defaults in a variety of forms by states and municipalities are already happening and more are inevitable.
Taxpayers are paying higher taxes in exchange for lower social services.
Municipal bond holders will experience their own form of contract renegotiation in the form of debt restructurings at the local level.
The Wall Street Journal responds by saying: “The trouble is, the muni market is by now well aware of these concerns. Ms. Whitney’s message has also been muddied by how cagey she has been about her past pronouncements, throwing around mystical terms like ‘fifth-derivative dimensions’ and declining to offer hard numbers or to explain herself in Congress.”
Last year, Ms. Whitney warned of multiple muni bond defaults and a “brutal” sell offs. It has not happened ? yet. Whether Ms. Whitney is a sage or just “a professional scary person,” as the Wall Street Journal states, is yet to be determined.
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