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Whitney: NJ Hasn't Done Enough About Fiscal Crisis

Tuesday, 28 Jun 2011 10:14 AM

New Jersey may have taken out a $2.25 billion loan to pay its bills over the next few months, but the state — and most others — is still unable to tackle its larger fiscal issues, says Meredith Whitney, founder of Meredith Whitney Advisory Group.

New Jersey officials are negotiating a temporary bank loan with JPMorgan Chase for as much as $2.25 billion to cover a revenue gap in its new fiscal year, The Wall Street Journal reports, citing unidentified people familiar with the deal.

The state is considering tapping a so-called bridge loan, or credit line, to cover bills coming due early in the year beginning July 1 as it prepares to sell tax-revenue anticipation notes to cover expenses until it collects taxes, the newspaper says on its website.

The notes would repay the bank loan.

The newspaper says state officials are negotiating with JPMorgan following competition for the business. A bank spokesman, whom the newspaper didn’t identify, declined to comment.

A spokesman for New Jersey, also unidentified, also declined to comment.

Yes it looks good when a bank extends credit. But terms surrounding the loan have yet to be determined. Plus looking at the longer term, however, the loan isn't going to solve New Jersey's woes.

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Meredith Whitney
(Getty Images photo)
"I think it's endemic of a larger issue. The tax receipts are tracking — this is not just New Jersey but nationwide — are tracking 2006 levels and spending is at an all-time high save for one state, which is Florida. So this is simply unsustainable," Whitney tells CNBC.

The real issue isn't budgets but unfunded liabilities.

"If you look at New Jersey they spend about 17 percent of their entire budget just on servicing their debt, underfunding their pensions and paying their healthcare and insurance costs. If they were actually to fund their pension on the actuarially required level, it would consume almost 38 percent of their total budget," says Whitney.

"There is just not enough cash and not enough funds to go around and service all of the strains on the state and what will happen is that there will be fewer monies to invest in key infrastructure projects, you'll be raising taxes. The state will become that much less attractive."

States are currently wrapping up their fiscal years and will begin slashing budgets.

That means that money that would go to municipalities and other local governments from the states won't be there, especially as states are cutting budgets and with them, aid to municipalities and local governments.

"What you will see now is that states are submitting final budgets now, you will see real pain at the municipal level start to happen July 1. And that will intensify and that's where you will see the fallout."

And that pain is going to stick around for a while.

"When you look at California or New Jersey, New Jersey in particular, they say it will be several decades to actually get to a funding level — I think it's 30 years — that's 88 percent funded," she said. "It takes a long time."

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New Jersey may have taken out a $2.25 billion loan to pay its bills over the next few months, but the state and most others is still unable to tackle its larger fiscal issues, says Meredith Whitney, founder of Meredith Whitney Advisory Group. New Jersey officials are...
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2011-14-28
 

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