Star Wall Street analyst Meredith Whitney late in 2010 said widespread municipal bond defaults were possible due to financial strain at the state and local levels.
Many Wall Street bigwigs disagreed, but Whitney is sticking to her guns and telling clients that state-level finances are even worse than once thought.
“I never intended on framing the scale of defaults as a precise estimate, but I continue to believe that degree of municipal defaults will be borne out over the cycle,” Whitney tells Fortune.
“I meant to point out that the state debt problem is a massive headwind for the U.S. economy, second in importance only to housing.”
The problem, Meredith says, is spending at the state level.
Since 2003, state governments have hiked annual spending to almost $2.2 trillion from $1.5 trillion, yet tax receipts have gone up by only $400 billion or $300 billion less, to $1.4 trillion, Whitney says.
Many states, meanwhile, are cutting funds they supply to local governments in order to balance their budgets.
That will hurt school districts and country budgets, according to the Fitch ratings agency, which does not bode well for the municipal bond market.
Shifting spending pressure from a state level government down to a local one still puts stress on local finances, especially if spending and revenue collection are not in sync.
“Even if a funding source is identified, it may prove insufficient to cover the service that needs to be provided or may not grow at the rate needed to keep pace with expenditure growth,” Fitch says, according to Reuters.
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