No imminent fiscal meltdown for states: report
WASHINGTON (Reuters) - U.S. states are not on the brink of financial collapse and there is no need to allow them to declare bankruptcy, a research group that closely tracks states' fiscal conditions said in a report on Thursday.
The Center on Budget and Policy Priorities has for three years sketched out the effects on states of the longest and deepest economic recession since the Great Depression, often warning that it may take years for states to recover from the economic damage.
But on Thursday it said that "a spate of recent articles" has lumped together states' recession-related fiscal problems with longer-term issues such as pension obligations "to create the mistaken impression that drastic and immediate measures are needed to avoid an imminent fiscal meltdown."
Most notably, analyst Meredith Whitney, who correctly predicted that the housing crisis would hobble undercapitalized banks, has warned that 50 to 100 municipal bond issuers representing "hundreds of billions" of dollars of debt could default or restructure their finances.
The Center said the risk of defaults and the fears that states are running up debt to finance operating costs was "greatly exaggerated" because the amount of states' outstanding debt over the last decade "remains within historical parameters."
Between 1970 and 2009, only four cities or counties defaulted, it added.
STATE ECONOMIES REMAIN WEAK
The think tank said state revenues are 12 percent below the levels they reached before the recession, and rising poverty and unemployment have put pressure on public services. States have cut spending and hiked taxes, as well as turned to the federal government, to address their budget gaps.
"While these deficits have caused severe problems and states and localities are struggling to maintain needed services, this is a cyclical problem that ultimately will ease as the economy recovers," CBPP said.
Concerns about their financial conditions are worrying taxpayers and investors in the $2.8 trillion municipal bond market and have led former Speaker of the U.S. House of Representatives, Newt Gingrich, to propose allowing states to declare bankruptcy.
Gingrich, a possible Republican contender for U.S. President in the 2012 election, is pushing Congress to give states the right to file for bankruptcy and renege on pension and other benefit promises to state employees.
CBPP, though, says that longer-term pension costs are frequently forecast at too large an amount and "such mistakes can lead to inappropriate policy prescriptions."
Specifically, the group questions the oft-cited estimate that states' pension obligations are underfunded by $3 trillion, putting the unfunded liability closer to $700 billion.
The higher estimate, by Joshua Rauh at Northwestern University's Kellogg School of Management, is based on an assumption that investments made by the pension funds will barely increase, while CBPP said the lower estimate is based on historical returns to the plans' assets.
It added that the recession has taken a large bite out of those funds' assets, and before the last two major economic downturn "state and local pensions were, in the aggregate, funded at 100 percent of future liabilities."
(Editing by Padraic Cassidy)
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