Bonus Video: Meredith Whitney discusses her report rating the finances of the 15 largest U.S. states -- Bloomberg TV
WSJ op-ed from Meredith Whitney published last month.
Bond subsidies and transfers have allowed states to avoid making tough decisions. It won't last. The threat posed by the state fiscal crisis in the U.S. is vastly underestimated and under-appreciated, because even today too few people understand how states have been managing their finances.
A clear example of this took place in Manhattan last week at the Economist magazine's Buttonwood Conference, where a panel role-played the federal government's response to a near default of the hypothetical state of New Jefferson. After various deliberations and simulated threats from the Chinese government, the panel reluctantly voted to grant New Jefferson an emergency bailout of $1.5 billion to cover the state's debt payment.
What this panel and so many other investors fail to appreciate is that state bailouts have already begun. Over 20% of California's debt issuance during 2009 and over 30% of its debt issuance in 2010 to date has been subsidized by the federal government in a program known as Build America Bonds. Under the program, the U.S. Treasury covers 35% of the interest paid by the bonds.
California is not alone: Over 30% of Illinois's debt and over 40% of Nevada's debt issued since 2009 has also been subsidized with these bonds. These states might have already reached some type of tipping point had the federal program not been in place.
Beyond debt subsidies, general federal government transfers to states now stand at the highest levels on record. Today, more than 28% of state funding comes from federal government transfers, the highest contribution on record.
These transfers have made states dependent on federal assistance. New York, for example, spent in excess of 250% of its tax receipts over the last decade. The largest 15 states by GDP spent on average over 220% of their tax receipts.
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Last month, Whitney put out a massive report on the worst 15 states.
Worst states
1. California
2. New Jersey, Illinois, Ohio (tie)
3. Michigan
4. Georgia
5. New York
6. Florida
Best states
1. Texas
2. Virginia
3. Washington
4. North Carolina
Neutral states: Pennsylvania, Maryland, Massachusetts
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More coverage:
Meredith Whitney Rates California Worst of 15 Biggest States - Bloomberg
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Bonus video...
Video: Whitney with Maria Bartiromo
- "It reminded me so much of the banks pre-crisis that we just kept working at it," she said. "We couldn't find anything that gave us a clear story, we couldn't find any information that was transparent. So we did it ourselves."
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