Meredith Whitney: The Hidden State Financial Crisis

Discussion in 'Wall St. News' started by nutmeg, May 17, 2011.

  1. Next month will be pivotal for most states, as it marks the fiscal year end and is when balanced budgets are due. The states have racked up over $1.8 trillion in taxpayer-supported obligations in large part by underfunding their pension and other post-employment benefits. Yet over the past three years, there still has been a cumulative excess of $400 billion in state budget shortfalls. States have already been forced to raise taxes and cut programs to bridge those gaps.

    Next month will also mark the end of the American Recovery and Reinvestment Act's $480 billion in federal stimulus, which has subsidized states through the economic downturn. States have grown more dependent on federal subsidies, relying on them for almost 30% of their budgets.

    The condition of state finances threatens the economic recovery. States employ over 19 million Americans, or 15% of the U.S. work force, and state spending accounts for 12% of U.S. gross domestic product. The process of reining in state finances will be painful for us all.

    The rapid deterioration of state finances must be addressed immediately. Some dismiss these concerns, because they believe states will be able to grow their way out of these challenges. The reality is that while state revenues have improved, they have done so in part from tax hikes. However, state tax revenues still remain at roughly 2006 levels.

    Expenses are near the highest they have ever been due to built-in annual cost escalators that have no correlation to revenue growth (or decline, as has been the case recently). Even as states have made deep cuts in some social programs, their fixed expenses of debt service and the actuarially recommended minimum pension and other retirement payments have skyrocketed. While over the past 10 years state and local government spending has grown by 65%, tax receipts have grown only by 32%.

    Off balance sheet debt is the legal obligation of the state to its current and past employees in the form of pension and other retirement benefits. Today, off balance sheet debt totals over $1.3 trillion, as measured by current accounting standards, and it accounts for almost 75% of taxpayer-supported state debt obligations. Only recently have states been under pressure to disclose more information about these liabilities, because it is clear that their debt burdens are grossly understated.

    Since January, some of my colleagues focused exclusively on finding the most up-to-date information on ballooning tax-supported state obligations. This meant going to each state and local government's website for current data, which we found was truly opaque and without uniform standards.

    What concerned us the most was the fact that fixed debt-service costs are increasingly crowding out state monies for essential services. For example, New Jersey's ratio of total tax-supported state obligations to gross state product is over 30%, and the fixed costs to service those obligations eat up 16% of the total budget. Even these numbers are skewed, because they represent only the bare minimum paid into funding pension and retirement plans. We calculate that if New Jersey were to pay the actuarially recommended contribution, fixed costs would absorb 37% of the budget. New Jersey is not alone.

    The real issue here is the enormous over-leveraging of taxpayer-supported obligations at a time when taxpayers are already paying more and receiving less. In the states most affected by skyrocketing debt and fiscal imbalances, social services continue to be cut the most. Taxpayers have the ultimate voting right—with their feet. Corporations are relocating, or at a minimum moving large portions of their businesses to more tax-friendly states.

    Boeing is in the political cross-hairs as it is trying to set up a facility in the more business-friendly state of South Carolina, away from its current hub of Washington. California legislators recently went to Texas to learn best practices as a result of a rising tide of businesses that are building operations outside of their state. Over time, individuals will migrate to more tax-friendly states as well, and job seekers will follow corporations.

    Fortunately, many governors are addressing their state's structural deficits head on. Unfortunately, there is a lack of collective appreciation for how painful this process will be. Defaults in a variety of forms by states and municipalities are already happening and more are inevitable. Taxpayers have borne the initial brunt of these defaults by paying higher taxes in exchange for lower social services. And state and local government employees are having to renegotiate labor contracts that they once believed were sacrosanct.

    Municipal bond holders will experience their own form of contract renegotiation in the form of debt restructurings at the local level. These are just the facts. The sooner we accept them, the sooner we can get state finances back on track, and a real U.S. economic recovery underway.
  2. She's doubling down on a losing bet. Bondholders will get paid if they have to eliminate every single social program out there and cut schools to 3 days a week, bondholders will get paid.

    Owners of debt will not be allowed to take a loss in Tim Geithner's America.
  3. your not only smoking crack Ralph, I bet you you believe in OBAMA NATION.

    Bond holders will be FUCKED just like they were with GM there slick.

    GOV does not care. I mean they care so much that they are now borrowing against State and Fed Pensions.

    Pull your head outa your ass and smell the Revolution that is to come.
  4. "States employ over 19 million Americans, or 15% of the U.S. work force, and state spending accounts for 12% of U.S. gross domestic product. "

    These stats say it all. goes up to over 40% when you add in the federal workers. think about this... 4 govt workers are being paid on the backs of 6 civilians.
  5. Bob111


  6. olias


    It’s no wonder Meredith Whitney wants to distance herself from her prediction of the municipal market’s meltdown.

    “I never said that there would be hundreds of billions of defaults. It was never a precise estimate over a specific period of time.” So said Whitney on Bloomberg Radio on Wednesday morning.

    This is what she said on an episode of CBS’s “60 Minutes” that aired on Dec. 19, 2010:

    “You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars’ worth of defaults.”

    As for timing, “It’ll be something to worry about within the next 12 months.”

    What this sounds like is Meredith Whitney saying there will be hundreds of billions of dollars’ worth of municipal bond defaults within the next 12 months. That sounds like a precise estimate over a specific period of time. And that’s how it has been reported and dissected in the press since then, with not a word of protest from Whitney.

    Until this week. Whitney told Bloomberg Radio host Tom Keene that she thought “60 Minutes” did a “really good job” on the story. “But the risk is that they take bits and pieces of an hour-and-a-half interview and certain portions are more magnified than others.”

    Whitney also later told Keene: “In the cycle of this municipal downturn, I stand by it. But we never had a specific estimate for that. That’s not the nature of our research.”

    So now we have Whitney standing by something she said she never said, and unfortunately -- for her -- recorded for posterity. You can watch the video for yourself on the CBS website. I saw the original segment when it was broadcast and have watched it several dozen times since then, just to make sure I heard what I thought I heard: that there would be hundreds of billions of dollars’ worth of municipal bond defaults this year.

    I guess the call is still for hundreds of billions of dollars’ worth of municipal bond defaults, but now over the duration of “this municipal downturn,” whatever that means. So far this year, 14 municipal bond issues totaling $605 million have defaulted, according to Richard Lehmann of the Distressed Debt Securities Newsletter. The record year for defaults was 2008, when $8.5 billion in municipals went bust.

    What so astonished municipal market investors about the Whitney call was its outlandishness -- “hundreds of billions” in a market that hasn’t seen a year in which defaults reached even $10 billion. Nobody denied that states and municipalities were in heavy weather, on many fronts, and that some issuers might default. Still, Whitney’s outlook, then and now, sounds absurd.
    Essence of Whitneyism

    Whitney shed some light on the “60 Minutes” call earlier this month at the Milken Institute Global Conference. The states, she said, were cutting aid to localities. “The local municipalities have nowhere to go and their bias is to save their constituents before they save their bondholders,” she said.

    This, then, was the underpinning of the Whitney prognostication, which acted as a sort of punctuation mark to almost two years of hysterical headlines, misguided commentary and know-nothing blog posts about the municipal market. The numbers didn’t add up because her prediction really wasn’t about the numbers. It was about mass repudiation of municipal debt obligations.

    As arguments go, there’s a certain logic to it. Make a few bondholders suffer, and some people may think you’re a hero. Raise taxes, and lose the next election.

    And yet, as arguments go, Whitneyism is an unsupported assertion. In the modern era, there is little to suggest that serious public officials will shirk their duty to bondholders. The results would be catastrophic, far worse than any temporary boon to taxpayers. Past performance is no guarantee of future behavior, but there has been nothing to signal that mass repudiation will become fashionable at any time, let alone within the next eight months.

    (Joe Mysak is editor of Bloomberg Brief’s daily Municipal Market. The opinions expressed are his own.)

    To contact the writer of this column: Joe Mysak in New York at

    To contact the editor responsible for this column: James Greiff at
  7. Tax Revenue Snaps Back



    It's clear she's a republican.

    Other than the idiot projects, ie building a gold course in the middle of the arizona desert, the rated debt will be fine.
  8. Oct. 12 (Bloomberg) -- The city of Harrisburg, Pennsylvania, facing a state takeover of its finances, filed for bankruptcy protection following a vote by City Council, according to a lawyer for the council.

    Mark D. Schwartz, a Bryn Mawr, Pennsylvania-based lawyer and former head of municipal bonds for Prudential Financial Inc.’s mid-Atlantic region, said he filed the documents by fax to a federal bankruptcy court last night. The filing couldn’t be confirmed with the U.S. Bankruptcy Court in Harrisburg.

    The state capital of 49,500 faces a debt burden five times its general-fund budget because of an overhaul and expansion of a trash-to-energy incinerator that doesn’t generate enough revenue.

    “This was a last resort,” Schwartz said in an interview after the council voted 4-3 to seek bankruptcy protection. “They’re at their wits end.”

    While bankruptcy would mean the loss of state aid under a law passed in June, it’s preferable to a proposed recovery plan, said Councilwoman Susan Brown-Wilson.

    “We’re not incompetent,” Brown-Wilson said. “We’re just not going to let you run us over with the train anymore,” she said, referring to state officials.

    Jason Hess, the acting city attorney, told the council members before the vote that they didn’t follow procedure and their action wouldn’t be binding. The members went ahead anyway.

    Preparing for bankruptcy is going to mire the city in litigation it can’t afford, said Councilwoman Patty Kim, who voted against it.

    ‘Don’t Have Money’

    “The problem still exists that we still don’t have money, and we still haven’t moved one foot forward,” Kim said.

    Harrisburg, the seat of Dauphin County, needs $310 million to make bond payments, restructure debt and repay the county and insurer Assured Guaranty Municipal Corp., which made payments the city skipped on the waste-to-energy facility. Schwartz said he expects Assured Guaranty will reduce the value of its debt.

    “Why should they be first in line?” he said.

    In an opinion article published yesterday in a local newspaper, the Patriot-News, the four council members who voted for bankruptcy said Assured Guaranty and bondholders should forgive at least $100 million of the debt.

    They also said there should be a countywide sales tax of 1 percent to help pay off the debt. Schwartz, in the interview, said that could forestall asset sales.

    Assets, Debt

    In a copy of the Chapter 9 petition provided by Schwartz, the city lists both assets and debt of $100 million to $500 million. According to the copy, the city has 49 or fewer creditors.

    The Pennsylvania Senate is scheduled to take up legislation next week that would make Harrisburg the first municipality in the state to be placed in receivership.

    The council in July and August rejected fiscal rescue blueprints from consultants hired by the state and Mayor Linda Thompson, triggering the legislative response.

    The bill would let Republican Governor Tom Corbett declare a fiscal emergency in Harrisburg and name a receiver who would develop a recovery plan. The manager would be able to sell assets, hire advisers and suspend the authority of elected officials who interfere. Unlike in Michigan, the receiver wouldn’t be able to change union contracts.
  9. jd7419


    So is it really as simple as the city pushing a green agenda bankrupted them? Red meat for liberal hating folk.
  10. Correctamundo!

    If this ratio isn't corrected, AMERICA WILL DIE! Too many tit-suckers.. not enough producers. The parasite class has grown too heavy to support. If it is not culled, both parasites and producers will perish.

    :mad: :mad:
    #10     Oct 12, 2011