Wednesday, May 18, 2011

Meredith Whitney on Grim Municipal and State Finances

She's taken a lot of grief for her bold predictions of widespread municipal bond defaults, but Meredith Whitney is back and not backing down. In an op-ed in today's Wall Street Journal, Whitney talks about the reality of state government finances, and if she's right, the next month could be a very interesting one in places like California.

Maybe so, maybe not.
Whitney's argument is similar to one we made recently about the possibilities of municipal defaults in California: while constitutional obligations to service debt before any expense (other than schools) might temper the rate of defaults here, what if the requisite spending and service cuts can't be implemented quickly enough to keep up with payments? As she points out, June is both the end of the fiscal year (when budgets are due) and the month when ARRA stimulus funds run out, so the time to address broken budgets is now. This problem is only exacerbated by the practice of keeping retiree benefits off the books; as many journalists in California have found, it's difficult to tell how serious municipal debt shortfalls are in many places. She closes with the following statement:
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.
Given the recent default in the Madera County town of Chowchilla and the increasingly likely default in Montebello, as well as the glaring lack of transparency regarding municipal pension liabilities, Whitney's words are worth pondering.


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