You would think that states are looking out for the best interests of their local towns and cities. But as the debt problems unfold around the country, it is becoming clear that they are not. As far as a state is concerned, municipalities are a burden. There’s a good chance your state treasurer is more concerned about the state’s credit rating or the state’s unfunded pension liability. Most treasurers don’t have a clue how the local plans even work..
Someone who does understand them is analyst Meredith Whitney. She famously called the subprime real estate crash. Her research moved on to municipal bonds—not on purpose, but indirectly. She wanted to know why GDP was up nationally while in the states, which make up 20% of GDP, it was down. And she found that to understand the states, you need to understand their cities and towns.
Soon after her findings, Whitney was interviewed by 60 Minutes last year and gave a ground-breaking prediction that hundreds of municipalities would file bankruptcy. Over the next month there was a fierce sell-off in munis. Michael Lewis talked to her about state treasurers in his new book Boomerang: “The scary thing about state treasurers,” Whitney said, “is that they don’t know the financial situation in their own municipalities.”
“How do you know that?” asked Lewis.
“Because I asked them!” responded Whitney.
In Rhode Island, Governor Lincoln Chafee made a lame attempt at including local plans in the state’s pension reform package. He and his staff came up with some carrot and stick language to prod the local plans into action. But, as Cranston Mayor Allen Fung describes it, there was no carrot and instead of a stick it was more like a bat.
According to Chafee, General Treasurer Gina Raimondo never wanted to take on the local plans. “She has always been reluctant to take on this challenge,” said Chafee. “She would push out reasons not to, even when you had Providence, Pawtucket and Cranston—three of the four largest cities in the state—in trouble.” Chafee was asked if this was because of a difference of opinion or politics by Raimondo. “The latter. The treasurer is too smart not to know the magnitude of the problem…. Whatever her reasons, this should have been taken on. This is the time,” said Chafee.
Municipalities are in trouble. East Providence is in trouble; not quite receivership, but it is certainly on the path to bankruptcy. An official from the Rhode Island state police is overseeing East Providence’s finances. What will he do when it comes down to a decision in cuts to the local pension for police and fire, which is in horrible shape, or services? This type of scenario will play out in locals all across the country.
E.J. Smith - Your Survival Guy
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