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State and local governments are known as municipal governments, or just municipalities. The bonds they issue are known simply as "munis". When the financial crisis reached its crescendo, the Federal government went into action to stimulate the economy.
Among other measures, it borrowed approximately $100 billion and gave it to the states to help them balance their budgets. But that was last year. This year, the states are on their own. What does all this have to do with Cuomo and Whitney? Let's make the connection.
Meredith Whitney was one of an army of financial analysts who toiled away in anonymity until she made a bold call as the financial crisis was worsening. She publicly predicted that the big banks would have to cut their dividends, something that would only be done in an emergency. She turned out to be correct. In fact, it got so bad that Citibank eliminated its dividend completely. As this played out, Whitney became a star. Back in December, CBS' influential 60 Minutes Sunday evening investigative show took a look at poor financial shape of the states and local governments. In the segment, Whitney was interviewed. Again, she made a bold call, that 50 to 100 or more cities and local governments would default on hundreds of billions of dollars of their bonds. Not being a bond analyst, let alone a specialist in munis, she was criticized almost immediately as being out of her league.
Then something very positive happened in New York, one of the country's most indebted states and one which was facing an enormous $10 billion budget deficit. New Governor Andrew Cuomo and the state legislature rolled up their sleeves and announced that they'd come up with a budget for this year which closed the budget deficit without raising taxes. They did it on time, to boot! The budget is due April 1 of each year, but the last time it was delivered on time was 2006.
With bold cost-cutting leadership like this, surely Whitney's recent bond call is going to turn out wrong. It even prompted respected business weekly Barron's to write an article titled "Cuomo 1, Whitney 0". The Barron's article (read here) discusses how, while there is a municipal bond crisis, default is not an option. It means that no one will ever loan you money again. For states and local government's that would be a nightmare. So, when their backs are really up against the wall, municipalities will cut spending, raise taxes and just do what they have to.
But there's something that Barron's missed. In the 60 Minutes piece, correspondent Steve Croft describes how Whitney believes that the states won't be the ones defaulting. She says that they'll muddle through by cutting aid to their own cities and counties. And, that's exactly what's happened in New York. For example, in the balanced budget state aid for education is being cut by $1.2 billion, with New York City's share being $300 million. This will likely result in mass layoffs in school districts throughout the state. Having more people collecting unemployment payments and being burdens on the economy instead of contributors will have significant ripple effects.
Cuomo 1, Whitney 0? Not so fast.
See: Amazing! State pols OK budget on time
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