Senior Vice President for State Fiscal Policy
Wall Street analyst Meredith Whitney has a new report on state finances, according to Fortune magazine, and, unfortunately, it appears to be just as disconnected from the evidence as her last one.
Whitney predicted last December that, within 12 months, there would be “hundreds of billions of dollars” of defaults in state and local bonds. The prediction was outlandish — the whole muni bond market is $2.9 trillion, and the few muni bonds that do default each year are almost always very small — and it has shown no sign of coming true.
Here’s a sampling of the errors in her new report, based on our reading of the Fortune story (Whitney’s full analysis is not publicly available).
States and localities do have real fiscal problems. In the short term, revenues are still depressed from the recession. In the longer term, states have antiquated revenue systems that are inadequate to pay for modern education, health care, public safety, and transportation systems. They also face rising health care costs, just as private employers and the federal government do, and many need to institute some pension reforms. The threat, however, is not to the bond market but rather to states’ and communities’ ability to provide needed services.
As Chris Hoene at the National League of Cities pointed out in his critique of Whitney’s “misinformation campaign”: “Investors should worry less about the risk of systematic collapse of the bond market and instead worry more about whether their local school, police department, or fire hall down the street needs a fundraiser to stay in service.”