Meridith Whitney (video & link below) is described by Fortune as "the superstar analyst" who predicted the catastrophe in the banking industry from which major segments of our economy are still reeling. She has recently completed a two year 600 page analysis of the economic health of the 15 largest states which contains some sobering observations and predictions.
Why the exhaustive study? "I was just so shocked by what I was seeing that I couldn't stop. Any long-term strategic plan needs to take account of the dangerous, mostly overlooked problems in the state finances." She also noted: "The states represent the new systemic risk to financial markets. I see a lack of transparency and an abundance of complacency on the part of investors and politicians, just as we saw before the banks imploded."
Professional politicians concerned only with getting elected are a major part of the problem according to Whitney. Massive deficits have been allowed to accumulate through off-budget mechanisms like deferring payments to pension plans in order to fund current operations. She says this ticking time bomb of unfunded liabilities amounts to generational robbery. And that is just one aspect of the problem with professional politicians.
Illinois resides in second place behind California on Whitney's worst states list. She warns that the current chaos in state budgets, exacerbated by a projected double dip in housing would likely propel some states towards bankruptcy. This could lead to an attempt in Congress for a trillion dollar bailout in order to prevent a number of states from defaulting.
In contrast to the states, Whitney believes municipalities will be allowed to fail. Local governments are likely to see continuing cutbacks in state assistance and little relief from their own debt burdens resulting in defaults on municipal bonds. Once defaults start hitting the bond market, municipal borrowing would become expensive and difficult to obtain. The combination of economic stresses and the inability to borrow would force severe cutbacks in services in many municipalities.
This report and numerous others illustrate this is a horrible time for misadventures in local governance.
http://finance.fortune.cnn.com/2010/09/28/meredith-whitneys-new-target-the-states/
Randy Budreau