Was Meredith Whitney Right About Municipal Bonds?

In December 2010, less than two years after our emergence from the worst recession in 70 years, banking analyst Meredith Whitney opined on CBS's 60 Minutes that we were on the precipice of a municipal bond apocalypse. Her prediction entailed that we would see "50 to 100 sizable defaults ... [that would] amount to hundreds of billions of dollars' worth of defaults."

For the most part, this prediction hasn't exactly panned out. There have been notable city bankruptcies, including Vallejo, Calif., and recently Pennsylvania's capital, Harrisburg, but nowhere near the 50 to 100 defaults that Whitney had called for.

So, does this mean Meredith Whitney's predictions were all wet? I don't think so.

I think Whitney's timing didn't work out as well as many of her other calls, but there are some very sizable defaults around the corner if something isn't done soon. Take a look at these eight cities currently running sizable budget deficits through 2012:


Deficit Through 2012

Budget in Fiscal 2012

Annual Budget Shortfall


$155 million

$3.11 billion



$100 million

$1.93 billion


New York City

$4.58 billion

$65.7 billion



$636 million

$8.2 billion



$60 million

$1.2 billion


Camden, N.J.

$28 million

$138 million


Los Angeles

$457 million

$6.9 billion


Source: Wealthwire, Reuters, Yahoo! Finance.

This is just a sampling of the budgetary shortfalls currently present. In Chicago, which boasts the highest per capita deficit by far of the above eight cities, building a city-owned casino could be in the cards, as well as eliminating 2,000 currently vacant jobs. For Camden, which is showing a 20% shortfall in its 2012 budget, it's trimming $14 million out of its law enforcement budget -- cutting its police force by half.

Forget Los Angeles by itself; the entire state of California is in dire straits. Gov. Jerry Brown recently stated that without strict austerity measures, California could be unable to pay $3.3 billion in bills by March. The state appears to have run out of money three months ahead of what lawmakers had predicted.

Even though her timing wasn't perfect, it appears that Whitney's calls are coming to fruition now and that austerity measures could be headed to a town near you.

In Harrisburg, a federal judge rejected the town's bankruptcy filing and is planning to put the city into receivership, with the state of Pennsylvania organizing a plan to turn the city around. With a city this size, a precedent is being set to determine whether other municipalities follow the same path as Harrisburg. Does this sound all too familiar?

In the end, municipal bonds offer significantly higher potential after-tax yields than bank CDs or U.S. Treasuries, so the allure of their historical safety is tough to ignore. But trouble in California, New York, and Florida, to name a few states, could be the driving force that cripples some popular diversified muni bonds investments like the iShares S&P National Municipal Bond ETF (ASE: MUB) .

Even more at risk are state-focused municipal bond funds like the iShares S&P California Municipal Bond (ASE: CMF) , BlackRock Florida Insured Municipal (ASE: BAF) , and the iShares S&P New York Municipal Bond (ASE: NYF) . These states all have budget shortfalls that could make even the riskiest income investor cringe with fear.

While I wouldn't go so far as to call for a muni-bond apocalypse, I do feel we have a long way to go to clear ourselves from decades of overspending. The question is, are you ready for austerity measures to hit you in your own backyard?

Share your thoughts in the comments section below and tell your fellow Fools what's being done in your town to curb spending.

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At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He wonders if Apple would buy California if it went to auction. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always rated AAA.

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