Meredith Doubles Down: Move Over Munis, Here Comes The "Hidden State Financial Crisis"

Tyler Durden's picture

There are those who thought that following the material pushback by every chatterbox on CNBC that the muni situation is actually nice to quite nice, contrary to what Meredith Whitney had prophesied, that the scourge of Citi would slink back into whatever hole it is she crawled out of. And then there is Meredith Whitney, whose occasional appearances on TV have resulted in 25 weeks of consecutive, and material outflow from municipal funds. Undaunted by her critics, she has now doubled down, and shifting away from munis, is now focusing one level higher: on the state financial crisis. Her conclusion, sure to set off a firestorm of angry responses tomorrow when the Op-Ed hits the print version of the WSJ: "Defaults in a variety
of forms by states and municipalities are already happening and more
are inevitable. Taxpayers have borne the initial brunt of these defaults
by paying higher taxes in exchange for lower social services. And state
and local government employees are having to renegotiate labor
contracts that they once believed were sacrosanct." And sure enough, she refuses to abandon her muni thesis: "Municipal bond holders will experience their own form of contract
renegotiation in the form of debt restructurings at the local level.
These are just the facts. The sooner we accept them, the sooner we can
get state finances back on track, and a real U.S. economic recovery
underway." Yes, well, one can argue that the sooner Ms. Whitney accepts that the modus operandi in the developed world is to preserve the status quo no matter the cost, and kick the can down the road indefinitely, the sooner we can all get back to a state of vegetative existence in which nobody questions anything and the world is one swell place until everything blows up.

Meredith Whitney: The Hidden State Financial Crisis, posted in the WSJ

Next month will be pivotal for most states, as it marks the fiscal
year end and is when balanced budgets are due. 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. Yet over
the past three years, there still has been a cumulative excess of $400
billion in state budget shortfalls. States have already been forced to
raise taxes and cut programs to bridge those gaps.

Next month will also mark the end of the American Recovery and
Reinvestment Act's $480 billion in federal stimulus, which has
subsidized states through the economic downturn. States have grown more
dependent on federal subsidies, relying on them for almost 30% of their

The condition of state finances threatens the economic recovery.
States employ over 19 million Americans, or 15% of the U.S. work force,
and state spending accounts for 12% of U.S. gross domestic product. The
process of reining in state finances will be painful for us all.

The rapid deterioration of state finances must be addressed
immediately. Some dismiss these concerns, because they believe states
will be able to grow their way out of these challenges. The reality is
that while state revenues have improved, they have done so in part from
tax hikes. However, state tax revenues still remain at roughly 2006

are near the highest they have ever been due to built-in annual cost
escalators that have no correlation to revenue growth (or decline, as
has been the case recently). Even as states have made deep cuts in some
social programs, their fixed expenses of debt service and the
actuarially recommended minimum pension and other retirement payments
have skyrocketed. While over the past 10 years state and local
government spending has grown by 65%, tax receipts have grown only by

Off balance sheet debt is the legal obligation of the state to its
current and past employees in the form of pension and other retirement
benefits. Today, off balance sheet debt totals over $1.3 trillion, as
measured by current accounting standards, and it accounts for almost 75%
of taxpayer-supported state debt obligations. Only recently have states
been under pressure to disclose more information about these
liabilities, because it is clear that their debt burdens are grossly

Since January, some of my colleagues focused exclusively on finding
the most up-to-date information on ballooning tax-supported state
obligations. This meant going to each state and local government's
website for current data, which we found was truly opaque and without
uniform standards.

What concerned us the most was the
fact that fixed debt-service costs are increasingly crowding out state
monies for essential services. For example, New Jersey's ratio of total
tax-supported state obligations to gross state product is over 30%, and
the fixed costs to service those obligations eat up 16% of the total
budget. Even these numbers are skewed, because they represent only the
bare minimum paid into funding pension and retirement plans. We
calculate that if New Jersey were to pay the actuarially recommended
contribution, fixed costs would absorb 37% of the budget. New Jersey is
not alone.

The real issue here is the enormous over-leveraging of
taxpayer-supported obligations at a time when taxpayers are already
paying more and receiving less. In the states most affected by
skyrocketing debt and fiscal imbalances, social services continue to be
cut the most. Taxpayers have the ultimate voting right—with their feet.
Corporations are relocating, or at a minimum moving large portions of
their businesses to more tax-friendly states.

Boeing is in the political cross-hairs as it is trying to set up a
facility in the more business-friendly state of South Carolina, away
from its current hub of Washington. California legislators recently went
to Texas to learn best practices as a result of a rising tide of
businesses that are building operations outside of their state. Over
time, individuals will migrate to more tax-friendly states as well, and
job seekers will follow corporations.

Fortunately, many governors are addressing their state's structural
deficits head on. Unfortunately, there is a lack of collective
appreciation for how painful this process will be. Defaults in a variety
of forms by states and municipalities are already happening and more
are inevitable. Taxpayers have borne the initial brunt of these defaults
by paying higher taxes in exchange for lower social services. And state
and local government employees are having to renegotiate labor
contracts that they once believed were sacrosanct.

Municipal bond holders will experience their own form of contract
renegotiation in the form of debt restructurings at the local level.
These are just the facts. The sooner we accept them, the sooner we can
get state finances back on track, and a real U.S. economic recovery

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The Feds Connection's picture

All this doom. I watched max keizer show on 24france yesterday. Taped on 28 oktober 2009 in which he sayd financial catastrophe would hit again in in 6-9 months. How long can this be stretched?

FunkyMonkeyBoy's picture

"How long can this be stretched?"Many a man has had the same thought.

The Feds Connection's picture 


Whatcha gonna do? i dont know! Just some lyrics. check it out,

max2205's picture

Oh no seal team 6 is flying to discuss this with Osama Whitney. With any luck at all the helo will malfunction

ebworthen's picture


They'll helo over to Pakystan to double-tap OBL but leave the Terrorists on Wall Street and Washington unmolested.

Where is our Military and Judiciary and FBI and Law Enforcement and their oath to defend the Constitution? 

As the Constitution is trampled they are tasked with chasing down religio-fascists in the Middle East.

How convenient.

JW n FL's picture

This story with great links that George put together is fantastic! that is where LEO's and all the others who swore to up hold the laws written by the duely elected are..


Corporations Own the Lobby!

The Lobby Owns the Government!

Law Enforcement works for the Duly Elected Lobby Whores!

We the People = Screwed!


nowhereman's picture

Yes, the powers that be are becoming afraid.  Their media whores are unable to keep the unrest under wraps.  Now they have to aim the "power" of government at the people.  Anyone who criticizes the government is now an "enemy combatent" and our sons and daughters will be used to keep us in our place.

It's all over except for the crying.

ebworthen's picture

It is amazing isn't it?

I bet Hitler would sit back some nights and say to himself:  "Holy shit, they let me get away with that too?  WTF!?!?"

Think of FDR confiscating gold and shutting down the banks.  "Holy Hell, no one assasinated me - all the WWI vets rolled over - wow."


Cleanclog's picture

All this liquidity in system, slogging around, still not multiplying into any meaningful money supply expansion in terms of economic goose.  So . . . if we still must delever the old fashioned contractionary, not inflationary, way then yep, State, Munis, more households and some small businesses must renegotiate debt, go bankrupt, renege on obligations.  More pain ahead. Sorry.

Popo's picture

Yep.  Poor Ben.   Inflation isn't working the way it's supposed to in his dusty old thesis.    This whole darn globalized economy just lets liquidity run out the door.   The only animal spirits that are getting juiced up on Ben's free-money are the spirits of emerging market economies.

If only there was a way poor Benny could tell the money where to go.   But of course, there isn't.  And the marginal returns on new liquidity are plunging faster than DSK's trousers.   The more Benny prints, the more the rest of the world goes up, and the faster America sinks.

He knows he's fucked.  The panic must be setting in.  He must be telling himself on a daily basis that his thesis will work eventually... just a little more time.

Meanwhile, gleaming Asian cities filled with luxury boutiques, five-star hotels, and world-class hospitals are looking more and more like the "First World", and America looks like the "Third".   Just a little more printing Ben.  Eventually you'll be right.... sure you will.

And hey -- if it turns out you're wrong -- the bankers will still be your friends.  They're the one's invested in EM's anyway.   Heads the bankers win, Tails America loses.



mayhem_korner's picture

Do you really want money velocity to increase and get to $13/gallon?

There's two ways out of this mess - death by hyperinflation or 'cross-the-board default and restructuring.  Here's the thing, the former still gets you to the latter, just increases the size of the stone that must be passed.

We should've taken our lumps in '08 when the problem was 40% smaller.  Strike that, we should have taken our lumps 20 years ago...

lemonobrien's picture

It'll last a good, long, while... look at japan.

Gubbmint Cheese's picture

It will only sound good when Jaime Dimon says it...

JW n FL's picture

JP Morgan’s leader “Jamie Dimon” says 100’s Municipalities in U.S. Won’t ‘Make It’ Out of Debt Crisis “Bloomberg”

Yep.. when he says it.. no one stands up and yells "CUNT!".

AUD's picture

The sooner we accept them, the sooner we can get state finances back on track, and a real U.S. economic recovery underway.

The sooner you accept them the sooner attention will turn to the biggest deadbeat of all... the sovereign. Inevitable but unacceptable.


Re-Discovery's picture

The funny thing is "State Services"?  What are they again?  State Highway Patrol . . . OK.  Whatever.  I have a gun and security system, and I like to drive over the speed limit.  They're irrelevant.  Education?  I'll educate my daughter thank you very much.  Transportation?  I'll dodge the potholes.  Fire?  F- you, I have insurance.

I hate every level of government so if the state goes away, I dont care.  I'd much rather the state be the sovereign than the Feds but they lost that battle decades ago.








Seymour Butt's picture

Why don't you move to Somalia? Don't let the door hit you on the way out.

mynhair's picture

Very intelligent response, makes me look like a genius. 

You in Shiela Jackson Leigh's district?

Central Bankster's picture

I prefer parasites like you, leave instead.

Re-Discovery's picture

does somalia have one layer of govt?  And a constitution (yes we still have one.)

BigJim's picture

You mean a 'country' that has absolutely no ethnic or cultural reason to be a contiguous state, detroyed by years of colonial meddling and collectivism? What's that got to do with wanting to reduce government? Somalia is the end result of too much government, not too little.

Re-Discovery's picture

My point exactly.  Folks think that I advocate nothingness. I am for an government that functions on the consent of the governed.

I advocate the lack of multi-level, state supported 'nothingness' and the promotion of individual, consent-backed SOMETHING.  A future determined by the stakeholders who secure it, NOT the parasites who seek a free ride.

nowhereman's picture

Not too much government, too much IMF.

mynhair's picture

but...but...who'd register your property liens?

Dejean Splicer's picture

I keep hearing bullshit from the muni-squawkers that they have to raise taxes or 'essential' services would be dropped.

You won't be safe. Mayhem will rule the streets and you will be imprisoned in your own home. 911 will take 90-120 minutes to respond to the most dire calls only.

Fuck you douche nozzles! Raise my taxes and YOU'LL be calling 911!

Re-Discovery's picture

I only own an old Shotgun, but I agree.  I see NO benefit to local and state government.  Street cleaning?  Maybe?  Please someone enligten me.

I got junked for something,.  Again, I have no clue what for.  Reduce government, be that the layers or whatever.  I dont care who goes bankrupt.  Tell me what they do and maybe I'll re-consider.

johnnynaps's picture

Oh, but you see the FBI, CIA, Homeland Security, 535 worthless politicians, and a military that doesn't even reside in this country as being more important than your local services? Just playing devil's advocate!

I feel we need teachers that teach worth-while subjects. Cops that protect and don't bill collect (I like to speed too). Real judges that understand jailing someone carrying a pound of marijuana isn't worth costing the state 500 grand. Shit this country really needs a dictator for the next 5 years, the whole system blows dirty donkey d##k!

Central Bankster's picture

Who says we want ANY of those things? 


I want less local services, I want a smaller military, fewer national politicians, limited federal police, less regulations, a free economy and yes, more liberal drug laws.


You aren't playing devils advocate.  You just don't understand that some people who want small government ALSO want more freedom.  Understand?

Re-Discovery's picture

My daughter and dog know where the government is in this house.  We have never had a govt employee come over and offer ANYTHING to us.  But we pay anyway.  (I will live with potholes.)

I am a Man I am Forty's picture

building/repair of roads, potholes, road cleaning, should all be paid for by the gas tax at the pump, other than that, I can't think of one single tax that benefits me or that I need or that I have used

baby_BLYTHE's picture

I'll live (currently do so) with potheads. Agree with everything you wrote.

Dejean Splicer's picture

"I see NO benefit to local and state government."

I agree. The alternative is: if local and state gov disappeared, israel would instruct their sleeper-cell AIPAC to force congress to move in for the kill and we would be living under federal law.

Federal law that was engineered for us by israel. Everyone must be a Patriot.

masterinchancery's picture

Pretty much on target for most of us; like to know who the weenies are that junked you.

Dejean Splicer's picture

Meredith, you have to admit she has a very strong track record.

Very strong.

Id fight Gandhi's picture

Seems to be good sport to rail her from the wall St bankers media.

Her timing may be off, but I do think shell be right

Barleycorn's picture

I think we all need to calm down and take a lesson from Candide - Everything worked out brilliantly for him and his companions...

mynhair's picture

Short CA.  Nuff said.

Central Bankster's picture

Short California munis into the ground.  Anyone got an ETF?

floydian slip's picture

I heard the talking heads on bloomberg making fun of her this morning.


All I have to type is...Karma is a bitch!


jm's picture

Translation:  expect a very modest increase in Muni defaults and huge operating budget cuts all over the land.

Revenues are drying up and this will last for years.  BUT with some exceptions, the local muni space has a cashflow problem, not a debt problem.  This means that financing is for capital expenditure and operating expenses and not rolling maturities.

This is a crucial point:  They can forego issuing new debt if needed.  Capital expenditure and operating expenses always get the hammer in this situation, not creditors.

If the world does go to hell in a handbasket, there is better recovery here than anywhere else. 

masterinchancery's picture

Perhaps in your state things are doable--here in IL, where Barack was once a gofer in the Senate,  we are flat out insolvent on all fronts.

jm's picture

I agree with you about Illinois.  California is a pile of trouble too.  But Illinois shows what happen when you HAVE to roll debt... you're effed.  States don't have that problem cut budgets to the bone but leave creditors untouched. 

I could be wrong.  I think country and city munis are where you are really compensated for the risk.

I am a Man I am Forty's picture

you are correct JM, I manage munis, sold all munis in CA, IL, and NJ back at the peak and have been enjoying the return on our munis that were purchased a few years ago in all other states, and they are doing well this year