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“The most alarming thing ... is the level of complacency,” says Meredith Whitney,...

“The most alarming thing ... is the level of complacency,” says Meredith Whitney, warning about a financial meltdown in state and local governments "in the next 12 months." The size of this calamity? "Fifty to 100 sizeable defaults ... hundreds of billions of dollars."
Comments (40)
  • There will only be defaults unless our glorious Redistributor fails to break up the public union pension contracts and replace them with more realistic ones. But, that would be political suicide. So, I vote for a major muni bond revolt instead.


    From 1998 - 2000, public pensions were inflated to match the dotcom fantasies. When those imploded, they were never re-negotiated down.


    Funny how that works. Its not that way in the private sector.
    20 Dec 2010, 12:52 PM Reply Like
  • Localities will just raise taxes to cover the shortfalls. Voters have to start pulling the "NO" lever on bond issues.
    20 Dec 2010, 12:52 PM Reply Like
  • Much like the federal entitlement programs, the math just doesn't work. You can't cover the shortfalls with taxes because the taxpayers literally do not earn enough dollars. Localities that try that approach will find out how mobile people can be ... and Texas will gain more House seats.
    20 Dec 2010, 01:04 PM Reply Like
  • I believe many of the munies are covered by local property taxes. As long as the voter has a say on the increased levy you are right. But most who would come out to vote on the increase have kids in school and where I live 90% of the levy goes to education. My dismay is why would they vote to build tennis courts and swimming pools and a new football stadium for the high school?
    22 Dec 2010, 09:07 AM Reply Like
  • In Illinois, voters rejected all but one new school bond. The local chatter is all about (1) not being willing to spend any more money on swimming pools, etc, when the primary purpose of public education, education has been marginalized by extra curricular activities. The mood of the electorate in Illinois is education needs to get back to the basics of teaching. (2) There is a new awareness of how much more government employees are paid than the taxpayers who fund them.


    The governor-elect of Florida ran on a platform of reducing the number of state employees by 6,000 and pulling government compensation back to be more in line with taxpayer earning levels. A bold move that got him elected. I'm sure congress is very nervous about providing another round of stimulus to the states to "maintain' government jobs with.


    We live in interesting times!
    22 Dec 2010, 10:59 AM Reply Like
  • and they continue to build those stadiums because they are using fear and intimidation to keep it going
    24 Dec 2010, 02:51 PM Reply Like
  • The people in Illinois on some of these issues though are still quite clueless ... DuPage country voters recently easily passed a 200 MILLION DOLLAR bond issue to get the junior college a new parking deck and some classroom remodels. Not tennis courts and swimming pools, but not much in core educatioon either. And 200 MILLION !!!! un**** real. The sales pitch on the referendum was that there would be no "immediate increase" in taxes. Campaign flyers were all over the place in support of this with "NO NEW TAXES" printed on it. One of the most highly educated counties in Illinois and yet so many are so clueless.


    So now there are no new taxes for this project. But a 67% increase in state taxes for prior years spending. And then this project can haunt everyone in 5 years when it will slam DuPage county citizens, painful it will be on top of the already ballooned state sales tax.
    18 Jan 2011, 02:01 PM Reply Like
  • You are correct...the Illinois government is very ignorant...higher taxes means capital would flee the goes to where is treated well.....
    18 Jan 2011, 02:11 PM Reply Like
  • “The most alarming thing ... is the level of complacency,”..


    I am not seeing complacency...the majority of people already knows the debt overhang problem and its consequences for potential growth capacity...a lot of people are already claiming the fall of the US....
    20 Dec 2010, 12:54 PM Reply Like
  • Really? No complacency? You must be in a fiscally responsible state.


    In CT for example, according to a Pew Research study, the people are on the hook for $15 billion in underfunded pension liabilities and $22 billion in unfunded benefits. Yet no urgency from the state or municipalities to curb borrowing and start cutting.


    Something's gotta give.
    20 Dec 2010, 01:06 PM Reply Like
  • The complacency isn't with typical non-government employed citizens. The complacency is with elected politicians who are afraid of losing the government worker vote in the next election.


    Some politicians realize the voting tide has turned against the government employee, i.e. The rest of the voters are forming an ad hoc voting blocks against more government largeness. Hopefully, politicians will see the light in time.
    20 Dec 2010, 09:20 PM Reply Like
  • We need more Governors like NJ Christie, taking a stand and reducing State deficit, although most difficult. There is simply no more money to spend, especially on these highly inflated state pensions. It's a shame, but the times are different and they need to reflect the new economy.
    20 Dec 2010, 12:58 PM Reply Like
  • CNBC just trashed Meredith's analysis and suggested that it was little more than fear mongering since the Fed will buy up every muni if necessary to prevent default. To my eye, Fed asset purchases are just default by other means.
    20 Dec 2010, 12:59 PM Reply Like
  • I'm astounded at how people have started viewing the Fed as a magic black box that will just keep things plugging along nicely by...well...we're not sure how, but we're sure they'll do something...and it'll be amazing.


    If the Fed starts getting into mass muni purchases, we're hosed. That's not like buying Treasuries from banks that then sit on the cash. That would be pumping funds that have instant velocity, creating some wicked inflation.


    But then, in our current societal condition, if you gave someone a credit card and told them they had an infinite limit and to not worry about repaying the balance, fiscal responsibility would fly right out the window.


    CNBC's analysis is just another example of not looking past the first ripple in the pond.
    20 Dec 2010, 01:06 PM Reply Like
  • The FED buying munis would certainly increase velocity, but I don't think by much as the money will go towards "saving layoffs", paying interest on debt, and paying bills, much like it did with the over-leveraged banks. It maintains the status quo and does not stimulate the economy.
    21 Dec 2010, 03:41 PM Reply Like
  • If the Fed were to by up muni's at a discount from face. The bonds would rally, they can borrow at close to 0% interest and the coupons on the bonds would produce a tidy profit. Then when they go to a premium (as long as interest rates stay relatively low) they can be sold off for a profit netting the US tax payer a huge profit and a reduction in the Nat. debt.


    Or, allow the banks to buy these muni's as part of their reserve requirements, LOL. The bank earnings could double/triple overnight compared to required treasury securities.


    Fear is the greatest opportunity for profit!
    24 Dec 2010, 09:24 AM Reply Like
  • Any "huge profit" the taxpayer might ever hear about in the distance will be completely stripped, barbque'd and eaten by their Gubmint before they ever see it. To suggest that the Gubmint is capable of producing a profit for anyone but the beltway bozos, tells me that the State Controlled Media is doing its job. You'll get the bill someday, and won't recognize that it's 48 Trillion dollars larger than your "profit."
    25 Dec 2010, 04:03 PM Reply Like
  • Get the feds out of our business and let them enforce commonsense laws and we are winners


    keep the class warfare going and the hate and the self destruction and power mad controlers in charge and watch as slavery comes back into vouge
    26 Dec 2010, 03:20 PM Reply Like
  • Some states may attempt to replicate the deception California's next governor is proposing to implement on Californians. They say they won't institute tax hikes unless the people vote for it. So, instead of cutting outrageous pensions and salaries of state employees along with other waste he's proposing to push forward an initiative that allows voters to vote to raise taxes or accept deep cuts to police and fire. One might think police and fire are the only acceptable cuts the new governor could find in the budget. But we all know how easy it is to con the majority of California voters.
    20 Dec 2010, 01:11 PM Reply Like
  • Duude -- I agree with most of what you are saying -- but don't forget that as Attorney General Jerry Brown cut the salaries of all state legislative department workers including the state senate and assembly. I don't think those cuts have been rescinded. But I agree with you that pension reform has got to happen and happen fast -- from the state down to the municipalities. There will be threats and tantrums felt across the state, but it has to happen. In San Francisco this past election it was put to the voters to basically slap the Muni Transit workers upside the head and it won overwhelmingly. This type of action if put on the ballet I believe would shake things up in state capitals across the US.
    20 Dec 2010, 01:29 PM Reply Like
  • "but don't forget that as Attorney General Jerry Brown cut the salaries of all state legislative department workers including the state senate and assembly."


    Uh, NO. An independent commission made the decision to cut legislative pay. The commission wasn't under Brown and in fact, had nothing to do with his office at all. Some legislators have asked Brown, as the attorney general, if the commission could cut their pay and Brown said, they could. But to say Brown cut their salaries is beyond spin. Like I was saying, its easy to con the majority of California voters.
    20 Dec 2010, 01:44 PM Reply Like
  • "The California Citizens Compensation Commission, which approved the salary reduction on a 5-1 vote, plans to seek legal permission to impose the pay cuts sooner. Under current law, the reductions could not take effect during incumbents' existing terms, most of which expire in December 2010.


    The commission's vote will shave rank-and-file lawmakers' salaries by more than $20,000 a year, from $116,028 to $95,143. The pay of legislative leaders will drop from $133,639 to $109,584. Tax-free per-diem payments of up to $35,000 a year would not be affected.


    The state's 238,000 employees already have seen their pay cut by up to 10 percent through involuntary furlough days. About 5,000 state workers received final layoff notices last week.


    Gov. Arnold Schwarzenegger, who set the stage for the legislators' pay cuts a few weeks ago when he appointed two of the five commission members who voted for them, applauded the move as a timely response to Tuesday's vote. "
    San Diego Union, May 21, 2009
    20 Dec 2010, 02:23 PM Reply Like
  • My understanding of municipal bankruptcy law is that it is quite different from corporate bankruptcy. I am not a lawyer and would appreciate further informed comment. My understanding is it is quite onerous on the entity involved.


    Regarding, QE MUNI, just threatening such a move would probably quiet the markets given FRB success with commercial paper and the mortgage markets.
    21 Dec 2010, 09:08 PM Reply Like
  • We need the services that local government provides. The only problem I have is the equity in property valuation and taxation.


    My locality in Virginia gives great tax breaks on commercial property to stimulate development. But this only stimulates more population growth and the need for more schools ie more bond issues. The commercial real estate interests gain speculative profits from the value appreciation and sales of buildings after nearly a tax free holding period during construction. The profit leaves the area and is now in the banks in New York and Miami.


    While all this happens, even in a declining real estate market, they increase my property valuation and my taxes have gone up!


    Property valuation is an administrative process where the appeal process is always more costly than the gain in a fair valuation. It would cost me $5000 in legal fees to fight a valuation to save me $500 in taxes on the property.


    If I am late in paying my taxes, they assess me an additional 10%. If I refuse to pay, they tell the mortgage holder and then they foreclose on the property. In the foreclosure, the county gets all the back taxes owed - the new owner picks up the burden.


    The time between foreclosure and new ownership to pay taxes is the main problem that is causing a cash flow problem for some municipalities. The bond holders in the process seldom if ever misses a coupon payment.
    22 Dec 2010, 09:21 AM Reply Like
  • "We need the services that local government provides. The only problem I have is the equity in property valuation and taxation. "


    Do you mean to imply that no budget cuts should occur?


    One little left over from the housing bubble: every new home means potentially at least 1 new kid in the system, if the property taxes collected can't cover the cost of said kid (about $12,000 per kid here in CT) then how is that shortfall made up? Moreover, many municipals have put caps (breaks really) on a new home's property taxes.


    So all over the country states and municipalities ramped up spending during the bubble because tax and fee revenues were through the roof, now when the extra revenues are dead, they are going borrow more and ask homeowners to pay more taxes on a depreciating asset. Not a good plan.
    22 Dec 2010, 09:51 AM Reply Like
  • 12 k per kid? Sheesh.


    Send them over to my house and tell them to bring 6 of their friends.


    We'll spin a globe around, bang a pair of chalkboard erasers together and re-enact Shakespeare.


    Then send them back home at 2:30PM. I'll also take off 3 months a year during summer, plus another 2 months in holidays and 'teacher's conferences'.


    That's 84 k for 6 months of short, half days. Not bad for just hanging out and learning.
    22 Dec 2010, 03:23 PM Reply Like
  • The overburdening of indigenous people with unpayable tax loads is a way to gentrify and raise taxes in those locations that can attract gentry.


    To understand this process in greater detail, one can look at Catherine Austin Fitts's explanation of what went on in Los Angeles when the lid began to blow off Iran Contra.


    She noticed patterns in the influx of illegal drugs into certain neighborhoods. She became a major persona non grata in the Kemp reign at HUD.


    She is still alive though, unlike Gary Webb, the journalist who turned up a lot of information on the issue. He reputedly committed suicide with three shots to his own head.


    The ability of a location to attract gentry will determine what happens with the bonds.


    The San Francisco Bay area and the Boston area seem able to attract gentry no matter what. Maybe they are safe despite other factors which might make one think they are not.


    This is a highly complicated topic.
    23 Dec 2010, 08:34 PM Reply Like
  • NOTHING COMPLICATED ABOUT MISMANAGEMENT and corruption by those on the Left and Right


    Either we get FISCAL conservatives or we continue to head into Castroville ( who denounced , with little fanfare by our MSM, that socialism had failed)


    btw, love the "suicide by 3 shots to his own head"
    24 Dec 2010, 02:44 PM Reply Like
  • Unions control the state employees
    Unions controlled GM
    Unions are outwardly ashamed of their socialist/communist connections BUT internally love the thug approach to their agenda


    proof is in their actions
    24 Dec 2010, 02:40 PM Reply Like
  • Seriously, local governments need to revolutionize education. The system just doesn't work. More money gets shoveled in and the kids keep doing poorer in school. The answer isn't teachers or administration or money. Get rid of high school, or at least make it an e-learning situation. Maybe if someone really wants to strive, hire them a public-funded tutor. Keep sports and activities. But otherwise, e-learning and equivalency tests. It will still be a somewhat similar experience, but most of the money drain will be gone.
    25 Dec 2010, 07:18 AM Reply Like
  • Wrong. Privatize the system and force the unions from yet another food trough in which to cavort. Vouchers for all students. Now.
    25 Dec 2010, 04:13 PM Reply Like
  • the idea of publicly funded schools was wrong from the inception


    any time you force one to give to another it wont turn out good


    the schools are living proof


    people like to cite Europe as some shining example




    pay directly from ones pocket to those who teach and you eliminate the admin the politics etc
    26 Dec 2010, 03:15 PM Reply Like
  • The best way to stop this ridiculous nonsense is have a school voucher system. There's a reason why the Teachers' Union flips out at the mention of school vouchers, they don't want ANY competition.


    The United States spends more per student than any country on Earth yet our kids have the worst test scores of any industrialized nation.


    We're being robbed and our children are being dumbed down.
    26 Dec 2010, 02:36 PM Reply Like
  • The Dept. of Education as well as the Departments of Labor, Energy, Housing and Urban Development, Health and Human Services etc. were formed as a way to dig wider moats for democrat politicians and create a perpetual voting bloc. Public employees on the SEIU gravy train are lefty chad yankers. They will always vote for more gravy, which is why they were formed. To provide democrats with a base. And the Dept. of Education is the biggest testament to the success of that sickening little goal.


    One thing to keep in mind. During the Great Inflation of Germany, the biggest losers were the public employees on fixed pensions. It will be that way here too. And since our politicians here don't have the stones to adjust down these pensions which are killing us, we will just have to let nature take its course and watch as the bond bullies do it for us. There are no adults in DC. Only children with their hands in the cookie jar. And those who vote for more cookies.
    26 Dec 2010, 05:49 PM Reply Like
  • Retired New York Sate teachers,town and county police receiving
    pensions of $100,000 per annum with retirement starts in their early
    50's,same for MTA workers (ticket collectors earning $100,000 per
    annum, Yonkers police non ranking officers earning $200,000 plus per annum with overtime. School administrators earning $200,000 per annum and collecting multiple pensions approaching $400,000 per annum. This is insanity someone needs to present the details of whats really going. Internet dating sites publishing the outrageous salaries of federal workers to solicit potential dates ! Its all insanity !
    27 Dec 2010, 10:34 PM Reply Like
  • This is simply outrageous! Government workers should never make more than the average salary of those they serve. The city should file for bankruptcy and renegotiate these pensions. Government needs to downsize (rightsizing) by centralization and consolidation of services with surrounding municipalities (especially within the same county). Otherwise, property taxes will continue to rise, even when values of home continue to decline.
    28 Dec 2010, 10:16 AM Reply Like
  • The difficulty with public salaries is that yes, they are supposed to track the private sector, but, while private sector incomes have held steady or decreased with regards to inflation, public sector incomes have increased and carry the bonus of benefits that outclass what the private sector offers.


    This combination is the mistake. The mandate is the government should pay its employees comparable salaries to the private sector but this has long ceased to be the case. however, I suspect it is next to impossible for the government to redress this and reduce or hold steady salaries and packages.
    28 Dec 2010, 12:37 PM Reply Like
  • Actually, it used to be that public salaries were less and you went into public 'service' because you felt you had a calling to 'serve' your community.


    Not anymore.
    28 Dec 2010, 12:39 PM Reply Like
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