Tags: Meredith | Whitney | State | Bailouts

Meredith Whitney: State Bailouts Have Already Begun

Wednesday, 03 Nov 2010 08:51 AM

Banking analyst Meredith Whitney says the bailout of financially strapped states has already begun.

“State budgets are likely to experience their second consecutive year with deficits of close to $200 billion,” Whitney writes in The Wall Street Journal. “The root of the problem is simple: State governments have spent recklessly and unsustainably.”

“New York, for example, spent in excess of 250 percent of its tax receipts over the last decade,” Whitney points out. “The largest 15 states by GDP spent on average over 220 percent of their tax receipts.”

“Clearly, states have been spending at unsustainable levels without facing immediate consequences due to federal transfer payments and other temporary factors.”

By the same token, Whitney notes that local governments now rely on state government transfers for 33 percent of their funding, so when a state finds itself in a financial bind, it has the option of saving itself before saving one of its local municipalities

Whitney says that, over the years, federal government transfers have subsidized business-as-usual state spending not covered by state tax collections. “Today, more than 28 percent of state funding comes from federal government transfers, the highest contribution on record,” much of it comes from a federal program known as Build America Bonds, under which the U.S. Treasury covers 35 percent of the interest paid by the bonds.

Moreover, beyond debt subsidies, general federal government transfers to states now stand at the highest levels on record.

“The level of complacency around this issue is alarming,” says Whitney. “I expect multiple municipal defaults to trigger indiscriminate selling, which will prompt a federal response.”

Bloomberg Business Week reports that the Los Angeles County Metropolitan Transportation Authority, the second-largest U.S. transit agency behind New York’s, leads issuers with a $740 million debt sale to expand its rail service from downtown to the suburbs.

The offering includes $600 million in Build America Bonds.

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Banking analyst Meredith Whitney says the bailout of financially strapped states has already begun. State budgets are likely to experience their second consecutive year with deficits of close to $200 billion, Whitney writes in The Wall Street Journal. The root of the...
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2010-51-03
Wednesday, 03 Nov 2010 08:51 AM
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