Dire warning on Florida's fiscal future: Will state burn while Tallahassee fiddles?
Wake up and good morning. A prominent analyst who predicted the great banking crisis in this country a few years ago is now sounding a new alarm on what could be the Next Great Debacle: Municipal defaults. And Florida may be front and center in the new mess, if she is right.
Meredith Whitney (photo below, right) this week released a 600-page report called "The Tragedy of the Commons" that warns of the coming day of reckoning from over-stretched state budgets. As reported by Fortune magazine, Whitney's report, which rates the financial condition of America's 15 largest states, warns that the giant gap between states' spending and their tax revenues, estimated at $192 billion or 27% of their total budgets for the 2010 fiscal year, presents two dangers that investors are seriously underestimating. (Here's the Fortune story.)
* The first danger: Municipalities could start defaulting on their bonds guaranteed by the cities and towns themselves, an exceedingly rare event over the past three, mostly prosperous, decades. "People keep saying it can't happen, just as they said national housing prices could never go down," Whitney told Fortune. "Now, it's a real danger" because municipalities receive one-third of their revenue from the states. And if states hold back that money for their own stricken budgets, towns and cities won't have the funds to make their interest payments.
* The second danger: Whitney sees the budget shortfalls crimping both employment growth and overall expansion. The common thread, she says in her report, between the banking and looming state financial crises is housing. "The entire financial system was over-leveraged to real estate," says Whitney. "So were the states."
And Florida is a classic poster child. Its housing bubble inflated rapidly during the boom years from 2000 to 2008. Florida, in fact, generated almost 30 percent of income growth from real estate. As tax revenues soared during the real estate frenzy, so did spending. Now revenues have collapsed with housing prices. But spending? It's not falling nearly as fast. The result: Today's gigantic deficits.
What investors are missing, Whitney told Fortune, is that growth in those states is destined to remain feeble because of the drastic measures needed to redeem their finances. By law, states are required to balance their budgets. Right now, the Obama stimulus package is making up over $60 billion of the $192 billion shortfall for fiscal 2010. But that money is slated to disappear next year. Many states, already plundering pension and healthcare funds, are raising taxes, or planning to do so.
Warns Whitney: "You have to look at the states and the risk that the states pose, because the crisis with the states will result in an attempt … for a third near-trillion-dollar bailout.... That has consequences on the dollar, that has consequences on just about everything. It certainly has consequences on the U.S. recovery." Read more here and here.
Here are Whitney's actual rankings of the 15 states she analyzed:
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
By the way, Whitney named her Tolstoy-length report The Tragedy of the Commons (which, alas, she is not yet making available in full except to her paying clients) from a parable about greedy farmers who let their sheep gobble up all the grass in a pasture, leaving the land barren and unable to provide in the future. Kind of like the spending frenzy that promises to decimate the prospects for many of America's largest, and formerly most prosperous, states, Fortune notes. The name also borrows from a 1968 article in Science magazine. It refers to a dilemma arising when multiple individuals act independently in their own self-interest and ultimately deplete a shared limited resource -- even when it is clear that it is not in anyone's long-term interest for this to happen.
Funny how neither candidates for Florida governor, Rick Scott or Alex Sink, are spending much time talking about this monster in Florida's closet. But since when are political campaigns about telling people what's really happening?
-- Robert Trigaux, Times Business Columnist