Crying Wolf on Muni Defaults Part 2: A Response to Whitney's CNBC Interview

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Jan 12, 2011, 06:22 ET

WASHINGTON, Jan. 12, 2011 /PRNewswire-USNewswire/ -- Christopher Hoene, Director of Research and Innovation at the National League of Cities (NLC), refutes comments made by Meredith Whitney, of the Meredith Whitney Advisory Group, on CNBC this morning.

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Hoene made his comments on NLC's blog CitiesSpeak (www.citiesspeak.org). Highlights of his response include:

"NLC offered a rebuttal to Whitney's 60 Minutes performance with Crying Wolf About Municipal Defaults. We were in good company, including PIMCO's Bill Gross and Federal Reserve Chairman Ben Bernanke.

"Whitney's comments reveal a stunning lack of understanding of the municipal sector and, unfortunately, seem based more on conjecture than facts."

"Whitney contends that local and state leaders do not have the political will to take policy actions to pay their debts, whether that is cutting services or raising revenues. But, local governments have been and will continue to cut services."

"...it is standard practice for many local governments to budget to pay their debt service before they fund other operational costs."

"But, cutting aid doesn't necessarily translate to defaults. State cuts are common during economic downturns. Yet, of the 54 municipal defaults (excluding technical defaults) that have occurred since 1970, only 4 came from cities and counties. In other words, the overwhelming preponderance of local governments respond by cutting spending or raising other revenues, not by defaulting on debt."

"The bottom line is that sky-is-falling reports about the muni market are lacking in evidence, but are receiving a lot of airtime and print coverage because they make for attention-grabbing headlines."

"The real story comes back to the question about whether local leaders will default on investors or constituents. It's a false choice. Defaulting on debt has dire ramifications for the shorter- and longer-term fiscal stability of local governments. The overwhelming majority of local leaders will protect debt obligations and will, if necessary, make cuts in services and personnel or raise revenues via taxes and fees. Those actions have ramifications for local economies and quality of life, issues which deserve considerably more attention."

To read the blog in its entirety, please go to www.citiesspeak.org.

The National League of Cities is the nation's oldest and largest organization devoted to strengthening and promoting cities as centers of opportunity, leadership and governance. NLC is a resource and advocate for 19,000 cities, towns and villages, representing more than 218 million Americans.

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SOURCE National League of Cities