US municipal mkt seen becoming casualty of deficits

NEW YORK, Oct 28 (Reuters) - The U.S. municipal bond market will become a "casualty" of massive deficits the 50 states likely will chalk up once the federal stimulus program ends, New York's lieutenant governor said on Wednesday.

"I believe that these States of the United States will face deficits the year after the stimulus ends of $300 to $500 billion a year," said Richard Ravitch, the financial guru who helped craft New York City's fiscal bailout in the mid-1970s.

Predicting this would be a major news story next spring, Ravitch added "and you may begin to see cracks in the municipal bond market well before that -- it's an inexorable casualty of unfundable state deficits."

"Banks are falling like autumn leaves around this country and nobody is projecting any significant growth for 2010," he said at New York University's Rudin Center for Transportation Policy & Management.

New York state gets one-fifth of its tax dollars from Wall Street and its meltdown has spawned budget gaps that Ravitch put at $3 billion to $4 billion this year, and $7 billion to $8 billion next year.

Congress enacted a two-year nearly $800 billion federal stimulus package, and when it ends, Ravitch said New York's state's deficit could shoot to $15 billion to $18 billion.

A total of 48 states already have deficits in their current fiscal years that add up to $179 billion, according to the Washington, D.C.-based think tank, the Center on Budget and Policy Priorities. For details, see: [ID:nNnN20445385].

The nearly $3 trillion U.S. municipal bond market, comprised of debt sold by states, counties, cities, hospitals, museums, turnpikes and the like, was pummeled during the height of last year's credit crisis but analysts investors have taken comfort from the historically note rate of defaults.

Experts said defaults would only become a problem if the recession was lengthy though they saw warning signs. Detroit schools this year mulled a bankruptcy, a step already taken by California's Vallejo, partly because its public payroll was so costly. [ID:nN13577598] and [ID:nN28339331].

Ravitch underscored one of the big problems facing New York: generous health benefits granted public workers. "It's creating a political conflict of some significance," he said.

Another problem is Medicaid, the state-federal health plan for the poor, elderly or disabled. New York has had trouble clipping its escalating costs, partly because it lets middle-class families collect this benefit instead of requiring them to spend more of their assets the way other states do.

Ravitch once ran New York's Metropolitan Transportation Authority, the nation's biggest mass transit agency, and he saw little room for public-private infrastructure partnerships because private capital costs more than tax-free muni debt.

One exception would be highways built by private firms that would charge higher tolls, he said. But he said drivers would have to have lower-cost public roads as an alternative. (Reporting by Joan Gralla; editing by Carol Bishopric)