Flight three of muniland’s harpy

June 9, 2011

I had really hoped that Meredith Whitney had gone back to analyzing banks and trying to interpret how the new Basel 3 liquidity ratio would be phased in. Unfortunately, she is back touring the mainstream financial media with another shrill message for muniland.

Muniland’s loudest harpy threw out some real doozies yesterday on CNBC and in a Fortune interview. The most outlandish claims Ms. Whitney made related to the proportion of state’s budgets that were going to service their debts. The substance of her statements were expertly demolished by Nicholas Johnson of the Center on Budget and Policy Priorities:

Whitney wildly exaggerates what states are spending on interest, claiming for instance that “debt service absorbs half of Nevada’s budget.”

Actually, Nevada’s own audited financial report shows that debt service (principal plus interest) is about 4.1 percent of state spending. Nor is it true that “Fixed interest expenses are absorbing a bigger and bigger share of state budgets”; interest payments have been declining as a share of state and local spending since the mid-1980s, as my colleague Iris J. Lav told Congress earlier this year.

Another big doozy from Ms. Whitney relates to pension funding. Here’s Nicholas Johnson again:

Whitney accuses states of “systematically underfunding their pensions” but then contradicts herself by noting that pensions were fully funded before they took a double-hit from the last two recessions. She also asserts that if states were to fund fully their pension promises, it would cost them 40 percent of their budgets.

That’s light-years from the truth. Boston College’s Center for Retirement Research says that states and localities can fund their pension promises fully if they devote somewhere between 5 and 9 percent of their budgets to employee retirement funds, because they do not have to close their current funding gaps all at once but rather can do so over time. If states make appropriate reforms to their pension systems, the cost can be even less.

There is a pile of work rebutting Ms Whitney. Much of it is distributed privately, the preferred method for the fixed-income world, but more and more of muniland pros are coming out to rebut her statements publicly. This is good because Ms Whitney has been sucking up all the oxygen in the room.

I’m still very curious about her motivation. She was asked on CNBC if her firm was trading municipal bonds and she said no. She stated that governors agreed with her analysis, but she sidestepped a question of whether she spoke to any governors. She said that it wasn’t necessary to analyze muni bonds at the security level (CUSIP), which is laughable because muni bonds, like all fixed income, can have priority of payment for state and local governments.

Am I unkind to call Ms. Whitney a “harpy?” I don’t think so. She has made an undifferentiated call on a $4 trillion market. She has rung the panic bell and spooked retail investors who have little understanding of the complexities of pension funding and other post-employment pension benefits (OPEB). She has painted all cities and states as being on the brink of fiscal disaster.This is so damaging and misleading. Some states like New Jersey, California and Illinois might drive themselves off a cliff, but every government is trying hard to avert a default.

Harping solves no problems. It only exacerbates fears and blocks constructive problem-solving. Stop harping, Ms. Whitney, and show up when Congress gives you a chance to state your case.


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