Meredith Whitney is on the warpath against out-of-control state spending. The banking analyst warns today in the Wall Street Journal that a wave of municipal defaults and indiscriminate bond selling will prompt the next big federal bailout. Indeed, she writes, the bailout has already begun.
More than 20% of California’s debt issurance in 2009 and 30% in 2010 to date has been subsidized by the federal Build America Bonds program, in which Uncle Sam covers 35% of the interest paid by the bonds. The BABs have subsidized an even higher percentage of bonds issued by Illinois and Nevada.
But debt subsidies are the tip of the iceberg. Writes Whitney:
General federal government transfers to states now stand at the highest levels on record. Traditionally, state revenues were primarily comprised of sales, personal and corporate income taxes. Over the years, however, federal government transfers have subsidized business-as-usual state spending not covered by state tax collections. Today more than 28% of state funding comes from federal government transfers, the highest contribution on record.
Get this: New York state expenditures represented 250% of its tax creceipts over the past decade. The figure for the 15 largest states by GDP was 220%. “Clearly,” says Whitney, “states have been spending at unsustainable levels without facing immediate consequences due to federal transfer payments and other temporary factors.”
Doo doo, as the saying goes, rolls downhill. Local governments depend upon state government transfers for 33% of their funding. If the federal government has to cut aid to states, the states will likely cut aid to localities. Expect a huge uproar from entrenched political interests when the house of cards collapses.
That day is not far off. States are staring at the second consecutive year of $200 billion budget shortfalls. Says Whitney: “Rainy day funds are depleted, pension-fund contributions are already at record lows, and almost all of the major federal government subsidy programs will run out in June 2011.”
One of the early tests of the new Congress will be whether or not to bail out the states and municipalities. If Congress refuses to act, we could see that wave of state and municipal bankruptcies. If Congress buckles, it opens up giant barrel of moral hazard.
Virginia’s General Assembly has hardly covered itself with glory when it comes to spending, but it has been less reckless than most states. We don’t need a bailout. And our elected representatives should not vote to approve bailouts for states that are chronically undisciplined and profligate. I’ll be following this issue closely, and I won’t be the only one. If any Virginia congressmen vote to bail out other states, they can expect one heck of a voter backlash.