Meredith Whitney On Federal Bailouts of State Excesses

Meredith Whitney wrote a short but compelling piece in today's Wall Street Journal concerning federal bailouts of state-level excessive spending.

Specifically, she shone a spotlight on how several states, including California, Illinois and Nevada, have issued bonds whose interest expenses are subsidized by the federal government. Whitney went on to describe the modern U.S. state's finances, which now typically include an average of 33% of funding from the federal government. She also noted,

"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."

Whitney repeats a concern many, including me, have expressed in the past, when she writes,

"How will taxpayers from fiscally conservative states like Texas or Nebraska feel about bailing out threadbare Illinois or California? Let's hope we never have to find out."

Considering New Jersey's current situation and political wrangling, and yesterday's election of another liberal Democratic governor in California, I think it's unlikely that we will not "find out" sooner than we would like.

In that vein, it's interesting that this column of Whitney's was both more sobering, yet also less worried than some of her prior warnings about state- and municipal-level defaults. This is an issue on which Whitney writes periodically and obviously follows closely. So it's puzzling that she only hints at consequences of this phenomena, rather than follows through with predictions for interest rates, debt, deficits, etc.