Meredith Whitney is an analyst famous for her superb call on Citigroup leading into the financial crisis and that they would cut the dividend and then wrong calling for a wave of municipal bond defaults. I wrote a piece at the time on why this prediction of defaults would be wrong and I proved prescient and you can read that piece here:http://kifcapitalmanagement.net/?p=209
Yesterday, Ms. Whitney was on CNBC stating the three most fiscally distressed states were California, Illinois and New Jersey. I would probably agree with her on this, but Illinois is distressed because of its public employee pension obligations and Medicare costs. Ms. Whitney told a story that Illinois is going to start charging kids for using school buses and the negative impact it would have on working mothers and the economy. You can see her whole interview here and the Business Insider story on this here: http://www.businessinsider.com/meredith-whitney-wildly-bullish-2012-4
The only problem is that Illinois said no such thing. The state for its part wants to change how it subsidizes school districts transportation costs from a fixed percentage of costs to reimbursing a state wide average. The concept is to make school districts more cognizant of costs, so that districts above the average can get their costs more in line with state wide averages. Of course, this might not always be possible as there are vast differences between Chicago and rural areas with different costs. But the decision whether to charge for school bus service will be left to the districts, it will not be state mandated. More importantly, any plan that charges kids to ride school buses will probably be susceptible to court challenges regarding equal access to education. Legally, it would be probably be easier to eliminate school bus service altogether, than have a user fee system, unless that user fee system is means tested.
This country is going to have to find a way to get state governments out from under its public employee pension obligations and the legalities of this will vary from state to state. Illinois recently raised its income tax 70%, though it is still considerably lower than California’s, New Jersey’s and Oregon’s.
Courts are going to have to grapple with states like California whose Constitution preclude it from filing a Chapter 9 bankruptcy to laws and perhaps state constitutional provisions that make public employee pensions inviolate with this reality. If you raise tax and cut services to where people flee and there is no tax base left, who is going to pay the pensions then? Whom will even pay the judges salaries?
Central Falls the smallest city in the smallest state of Rhode Island already filed Chapter 9 bankruptcy because of its pension obligations and was able to cut those pensions. Rhode Island Governor Chafee two days ago proposed more relief for localites from state mandates on public pensions.