Earlier this summer financial analyst Meredith Whitney released a new warning on the financial state of the states saying, the fiscal mess is far worse than official estimates. The only way to avoid massive municipal defaults she concludes is by raising taxes and cutting social services. Whitney first predicted hundreds of billions in defaults in a 2010 60 Minutes interview. They've yet to happen and many analysts doubt they ever will.
Jeffrey Miron economics professor at Harvard university and a senior fellow at the Cato Institute isn't so doubtful. He's out with a report of his own that states, "state government finances are not on a stable path; if spending patterns continue to follow those of recent decades, the ratio of state debt to output will increase without bound." Driving those costs he says are health care costs.
"Things are bad for basically all the states for almost identical reasons," Miron says in the accompanying interview with The Daily Ticker's Aaron Task.
In addition to the bad fundamentals, many states are, "not stating their current fiscal situations accurately," Miron concludes. The problem is pension liabilities are not being accounted for in state budgets. The results: states across the country, he estimates, are underestimating their liabilities by $1-2 trillion.
That's the bad news.
The good news is there's time to fix the problem. Miron estimates states have two or three decades before the true state GDP to debt ratio rise to the 90-100%, which is the historically range where governments have problems servicing their debt.
- Meredith Whitney