Predictions of an “imminent fiscal meltdown” among U.S. states and municipalities are exaggerated and create “unnecessary alarm” for policy makers, the Center on Budget and Policy Priorities said in a report.
The operating deficits most states are forecasting for fiscal 2012 are the result of the post-recessionary weak economy and have been erroneously conflated with longer-term issues such as debt, pension obligations and retiree health costs, Iris J. Lav, senior adviser at the Washington research group, and Elizabeth McNichol, a senior fellow, said in the report today.
“Overheated claims about state and local budget problems not only are inaccurate, but also could lead policy makers to take unwise steps such as allowing states to declare bankruptcy or forcing them to change the way they report their pension liabilities as a condition for issuing tax-exempt bonds,” Lav said in a press release accompanying the report’s release.
U.S. states confront deficits totaling $140 billion in the next fiscal year, according to a Dec. 16 report from the center.
Meredith Whitney, the banking analyst who correctly predicted Citigroup Inc.’s dividend cut in 2008, has predicted as many as 100 “significant” municipal defaults reaching “hundreds of billions” of dollars this year. That forecast has been met with skepticism by bond analysts and investors including Lyle Fitterer of Wells Capital Management in Menomonee, Wisconsin, the top manager of U.S. municipal-bond funds in the past decade.
Municipal-bond defaults are “extremely rare” at less than one-third of 1 percent, the center said in the report, citing calculations by the three major rating firms. Most defaults are on bonds to finance housing or hospital construction and reflect problems with those projects, not the fiscal health of the local government.
While unfunded pension liabilities of states and localities have been estimated at as much as $3 trillion, the figure is a “more manageable (although still troubling)” $700 billion, according to the report.
The suggestion that federal legislation should permit states to declare bankruptcy — potentially allowing them to default on their bonds or reimburse vendors less than they’re due — “could do considerable damage, and the necessity for it has not been proven,” the report said.
“Some who claim there is a state debt crisis have likened states’ problems to those in Greece or other European countries,” the report said. “There is no way directly to compare the state debt situation with a national government’s debt situation, but Greece’s situation was clearly far worse than the situation in the U.S. today.”
The Center on Budget and Policy Priorities is a nonpartisan, nonprofit research group funded primarily by foundations and philanthropies. It receives no funding from government or unions.
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