Photo: 60 Minutes
Analyst Meredith Whitney has been repeatedly lambasted for her prediction on “60 Minutes” in December 2010 that “you could see 50 to a hundred sizable defaults” in municipal bond markets.In truth, there have been relatively few important municipal defaults—just an average of 5.5 per year in 2010 and 2011 compared to 2.7 per year from 1970 to 2009, according to Moody’s.
However, Fortune’s Duff MacDonald argues today that pointing to the mere number of defaults misses the point of Whitney’s analysis. While she was too specific in her prediction, in general, he finds, she has been proven right.
From his editorial:
The more general point that she was trying to make—that municipal finances in this country were a mess that was only going to get messier—was dead on. Laugh at her all you want, but then try this: go find one person who says their local taxes are falling or their municipal services have improved in the past year or two. I wish you luck in your endeavour.
Munis may not have defaulted in a drastic way over the last year and a quarter, but that doesn’t mean that they’re not under strain, or that they would have been able to survive without the support of state governments that have taken action over this period to prevent Whitney’s prediction from coming true. In particular, MacDonald notes that New Jersey’s Chris Christie, Florida’s Rick Scott, and Indiana’s Mitch Daniels have gone to great lengths to return their municipalities and states overall to fiscal health.
True, this does appear to support the scaled-back assertion Whitney made in early 2011, that municipal defaults would be “social contract” or “employment contract” defaults—changes to trash removal schedules, pensions, road care, etc. But it’s hard to deny that such developments are a reality in many municipalities.
What’s more, MacDonald notes, it is a battle that is still being played out:
Alabama’s Jefferson County has actually gone bankrupt. Stockton, California is all but ready to do the same. And all you have to do is look to Detroit—or any of the nearby auto towns named after a Buick model of one sort or another—and you see fiscal crisis playing out right now. Look in your own backyard—or at the potholes on your neighbourhood roads—and you will likely find the same.
Moody’s appears to agree with him. In an announcement released on March 7, the ratings agency wrote:
“Although we have seen large entities like Jefferson County in Alabama seek bankruptcy protection, most bankruptcy filings or defaults in 2011 came from small cities struggling to sustain general government services,” said Anne Van Praagh, Moody’s chief credit officer for public finance. “They include the burdens of non-debt obligations, including pensions, entitlements, and salaries that have grown out of proportion to the resources available to pay for them.”
So Whitney is right—at least in a general sense. Municipalities are and will continue to suffer the ill effects of past spending they could not afford. Whitney’s broader point is more important than her specific prediction, regardless of her attempts to defend it.