Tags: Meredith | Whitney | Muni | Bond | Holders | default | deficit

Meredith Whitney: Muni Bond Holders Should Expect Pain

Wednesday, 18 May 2011 11:26 AM

Meredith Whitney, the banking analyst who last year predicted “hundreds of billions” in defaults on municipal bonds, is sticking to her guns. Taxpayers “will be surprised” at how underfunded pensions really are, she writes in The Wall Street Journal.

States by law must balance their budgets and most state legislatures will have to ‘fess up next month, when their budgets are due, says Whitney, CEO of Meredith Whitney Advisory Group. Municipal bondholders won't be spared, she warned.

“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,” she maintains.

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Meredith Whitney
(Getty Images photo)
“Yet over the past three years there still has been a cumulative excess of $400 billion in state budget shortfalls.”

The result will be serious pain for the entire U.S. economy, since states employ 15 percent of the work force and state spending is 12 percent of total GDP. “The process of reining in state finances will be painful for us all,” Whitney writes.

The primary problem has been static tax receipts combined with automatic cost increases, Whitney explains, citing her firm’s research.

“While over the past 10 years state and local government spending has grown by 65 percent, tax receipts have grown only by 32 percent,” she writes.

Off balance sheet debt, that is, pensions and retirement benefits for state workers, comes to $1.3 trillion. Some governors get it and are working to restructure, but she reiterated her stand that municipal bondholders are at risk.

“Municipal bond holders will experience their own form of contract renegotiation in the form of debt restructurings at the local level,” she writes. “These are just the facts.”

California, the poster child of bankrupt U.S. states and an economy so large it is often compared to sovereign nations, now sees the light at the end of the tunnel — sort of.

Tax revenues are expected to rise with the recovery by $6.6 billion through July next year, giving Gov. Jerry Brown room to restore $3 billion in school spending over his earlier budget on spending of $88.8 billion. The debt at its worst hit $26.6 billion but has shrunk on drastic cutbacks to $9.6 billion, reports the Associated Press.

Nevertheless, he warned against complacency.

"California's finances were plunged into turmoil by the Great Recession and a decade of short-term fixes and fiscal gimmicks," Brown told reporters. "This is not the time to delay or evade. This is the time to put our finances in order."

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Meredith Whitney, the banking analyst who last year predicted hundreds of billions in defaults on municipal bonds, is sticking to her guns. Taxpayers will be surprised at how underfunded pensions really are, she writes in The Wall Street Journal. States by law must...
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2011-26-18
Wednesday, 18 May 2011 11:26 AM
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