Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Muni Bondage: States in Pain

When I asked him recently about the possibility of state failure, legendary investor Jim Rogers said, “This is old news. I and others have been explaining about the perilous state of the US states for a few months.”

Uncle Sam taking money out of your wallet
iStockphoto

It may be old news to Jimmy, but state failure is an issue that could be new news once we get through the midterm elections, especially come January 1st when states can no longer stuff their budgets with federal cash.

Couple that with a looming municipal bond failure that Meredith Whitney believes is the real threat to the US States and you've got some states in pain.

Whitney says that municipal debt has doubled since 2000 and spending has long outgrown revenues. Remember that municipal bonds are guaranteed by the cities and towns themselves, who in turn receive about a third of their revenue from their state governments. If the states get into hot water with their own fiscal houses — as is already the case for many — they may withhold their revenue from the cities and towns, causing those municipalities to default on their loans.