Meredith Whitney doubts CA recovery

Meredith Whitney wikipedia commonsJune 5, 2013

By Wayne Lusvardi

California comeback? Maybe not.

Municipal bond expert Meredith Whitney was interviewed on June 4 by Steve Forbes in about her new book, “The Fate of the States: A New Geography of American Prosperity.” She is well known for predicting bank problems just before the September 2008 financial crisis.

She made this trenchant statement about California:

“What’s incredible is from 2008 to 2011 the U.S. G.D.P. (gross domestic product) grew 6 percent.  But California grew 1 percent to 2 percent.  But Louisiana grew in the high teens.  So you have an incredible divide between high single digit G.D.P. growth in the central corridor and basically next to no growth on the coasts.  It’s a rebalancing of the economy.  So the entire G.D.P. is two-plus percent.  It’s the tale of two very different countries, I think.”  

So California grew at 4 percentage points less (6 percent minus 2 percent), helping retard the national recovery.

According to Whitney, your future economic fate will depend on the fate of the state you are living in. Whitney had more to say about California in her interview than any other state.  And what she said is troublesome because many in the media have declared that California is making a recovery.  Gov. Jerry Brown also said in his State of the State address, “California is back, its budget is balanced, and we are on the move.”

More taxes not resulting in better things for kids

Whitney says that when government raises taxes, people think that kids are getting educated, getting school lunches, infrastructure is getting built or repaired, and public safety comes first.  The reality is that more and more taxes are going first for pensions and municipal bond obligations.

A prime example for Whitney is California, which last November passed Proposition 30, Gov. Brown’s $7 billion tax increase.

“A lot of that went to pension funds,” said Whitney.  “Money is going to pay for pensions, money is going to pay for bonds, and money’s not going to critical issues like education.  Because if you don’t educate, you can’t attract jobs.”

Indeed, shortly after Prop. 30 passed, the Caifornia State Teachers’ Retirement System announced it needed another $4.5 billion a year for 40 years from the state’s general fund to keep its fund solvent.

“Smart Money” not betting on California

According to Whitney, “smart money” is voting with its feet by choosing to build businesses in Texas and Louisiana instead of California.  Whitney asks, “What is the ultimate quality of life differential?  Do I really want to drive down the Pacific Highway every day?  Is it worth twice the cost to live in Texas, in Austin, and Wyoming?  How much are things really worth?” 

Whitney describes a “pension math mystique” whereby states target an 8 percent return to fully fund their pension obligations.  When states don’t generate an 8 percent return, “they’re automatically guaranteed to then reinvest to get back up to this high water mark of 8 percent.  And you know who’s paying for it?  Our tax dollars.”  She believes the current forms of public pension funds are unsustainable. The rate of return on the pension funds for the California State Employees’ retirement System was 7.75 percent, until it was dropped just a bit to 7.5 percent in March.

Here’s how Whitney describes what is likely to happen, “If your park closes or your park is unsafe all of a sudden, it affects you in a very major way.  And how quickly your fire truck comes to your hometown fire.  If they’re under duress in towns in California, 30, 40 minute response times.”  

“It’s over” 

Asked by Steve Forbes if “it’s over for towns in California,” Whitney responded: “It’s over. Yeah.”

A big bailout for California is not in the offing.  “Why would a Texan want to save a Californian?”  Whitney said every state is going to have to get to the point of forcing new workers into 401(k) retirement plans.  She predicted that, to generate the amount of political will needed to make improvements, things first have got to get worse.

The only state singled out by Whitney for courage to reform its pension systems is Indiana.  Another key reform that Indiana did is privatize.  By privatizing, Indiana got nearly $4 billion for paying down debt and investing in education. 

Whitney also said California is on the wrong track with its public-funded California High-Speed Rail project because it doesn’t make sense economically.  She cited Texas as a counter-example that has privatized tollways and public transportation.  She believes railways and the U.S. Postal Service also could be privatized. 

California’s slow broke

When questioned whether California would go broke, Whitney answered, “If they go broke, it’s going to take a really, really long time.”  She called California “the most dysfunctional political environment in the country.” The state will keep getting weaker and weaker each year until it has to start “selling down” assets.

Whitney was asked about population trends. “It’s incredible,” she said. “The first emigration or decline in population in California in 150 years.  What you see is high structural unemployment in states like California and the stalwarts of the last economy.”

The moment of truth for California and other states may come when the General Accounting Standards Board changes the rules next year to make it “apples to apples” when estimating unfunded pension liabilities, meaning public-sector pensions would be assessed according to standards already in place in the private sector.

Whitney predicted a big demographic shift in the next 30 years. People will ultimately move to where the jobs, cheap energy, and lower taxes are.  And that isn’t California.


Write a comment
  1. stolson
    stolson 5 June, 2013, 09:29

    U.S. Postal Service also could be privatized. Yes, this has been aired many times before, but nothing is done by Congress but fund more money.

    when estimating unfunded pension liabilities, meaning public-sector pensions would be assessed according to standards already in place in the private sector–what does this mean? Many companies no longer have a pension plan.
    You have a 401K and SS to look forward to.
    CA will go broke but slowly? Really? Seems it is just around the corner now.

    Reply this comment
  2. The Ted
    The Ted 5 June, 2013, 10:00

    Lol. Merideth has never been wrong!

    Reply this comment
  3. SkippingDog
    SkippingDog 5 June, 2013, 10:24

    Didn’t Meredith Whitney predict that the entire municipal bond market would crash before the end of 2012? She might as well be one of the nutjobs like Mish who appear on Coast to Coast AM to spout their pet economic theories.

    Reply this comment
  4. Tax Target
    Tax Target 5 June, 2013, 10:32

    Hey Skippy Dog… the lawn awaits….

    I just hope you stay here in Kalifornsky to reap the rewards of your distorted thinking… Nutjobs? I doubt it. If you’re not getting out of Kalifornsky now you should be.

    I’m just sooooo looking forward to not having to pay Kalifornsky taxes –

    Reply this comment
  5. Wayne Lusvardi
    Wayne Lusvardi 5 June, 2013, 14:18

    UCLA Anderson Forecast paints dismal picture of economic recovery

    6/5/2013 1:20:07 PM · by SeekAndFind · 8 replies

    Los Angeles Times ^ | 06/05/2013 | Ricardo Lopez

    “It’s not a recovery. It’s not even normal growth. It’s bad,” UCLA economist Edward Leamer says. The country’s tepid growth in its gross domestic product isn’t creating enough good jobs to build a strong middle class, according to a UCLA report released Wednesday.,0,7676874.story

    Reply this comment
  6. Queeg
    Queeg 5 June, 2013, 15:24

    Gloom and doom…..the freeways are loaded….House.s are selling with up to 20 offers on some….restaurants selling overpriced slop food with no problem….carb factories……teenagers have I-phones… normal…..or recovery….

    Reply this comment
  7. Donkey
    Donkey 5 June, 2013, 18:57

    Queeg Steals, lay off the bottle, you’re babbling.

    The economy sucks, I have never seen it this bad. Real unemployment is at 25% in California. The official numbers are absolute lies, disseminated by RAGWUS feeders. And the only people buying homes work for the RAGWUS! I sold two homes to RAGWUS feeders. 🙂

    Reply this comment
  8. RT
    RT 5 June, 2013, 19:54

    California is what you get when you have an environment of entitlement. It leads to the takers and their allies slowly pulling down the makers. However, the takers think that the gravy train will never end, and why should they? We keep giving them more and charging it to the makers or putting it on some imaginary credit card and hoping the feds will bail us out. But no one cares enough to stop it. California is lost. Unfortunately the only way to wake up California’s voters is for it to crash. Until then they will continue to ride the takers gravy train.

    Reply this comment
  9. I. Flanders
    I. Flanders 5 June, 2013, 20:31

    Texas sucks, do not move here. Stay in California, you would not like it here, you would be exposed to Freedom and low taxes. Not to mention personal responsibility. weed is still illegal . you would wilt and die of boredom!!!

    Reply this comment
  10. Ulysses Uhaul
    Ulysses Uhaul 5 June, 2013, 22:50

    Ah……why not get on the bandwagon……work government live good….

    Reply this comment
  11. SkippingDog
    SkippingDog 5 June, 2013, 22:51

    Did you miss this part of the LAT article you attached, Wayne?

    “Despite the less-than-rosy outlook for the U.S., California’s economic picture is brighter in large part because of demand for California goods, such as computers and other technology, UCLA economists said.

    The Golden State outperformed the U.S. in the rate of payroll jobs growth in the 12-month period that ended in April 2013. Only Utah has added jobs faster than California.”

    BTW, bad as it may be, how does the economic recovery and growth of the U.S. compare with other industrialized nations in the world? I think you’ll find that we’ve been in a worldwide economic down cycle and the U.S. is doing much better than other places.

    Keep up the doom and gloom though. It helps Ulysses rent trucks and trailers.

    Reply this comment
  12. Bill F.
    Bill F. 6 June, 2013, 10:01

    I wish that your were incorrect when you stated, “California is what you get when you have an environment of entitlement.” but you are spot on. Sure, you can see this as doom and gloom, but you can also see this as a reality that many refuse to embrace. California’s economy could be doing much better if we started having expectations of those that are social services programs are supposed to help.

    Reply this comment
  13. Wayne Lusvardi
    Wayne Lusvardi 6 June, 2013, 10:51


    Remember it is you, not me or even Meredith Whitney, who are contending that we are doom and gloomers.

    As I have repeatedly said, California is up against slow population growth and a slow jobs recovery. That is drecovery and it is population growth but it is slow. Slow isn’t doom. And it isn’t boom. It looks more like gloom. It’s muddling through. But muddling through is unlikely to hit the 7.75 percent target rate of return for Cal-PERS and Cal-STRS investments which is what you are understandably concerned about.

    We are all on the same side of the table trying to find a solution to slow growth. Nobody wishes doom on California.

    Reply this comment
  14. jimmydeeoc
    jimmydeeoc 6 June, 2013, 11:44

    “Nobody wishes doom on California.”

    I do…….but only for its usefulness as a tool.

    Because until we hit doom, we won’t be able to part the gloom and return to boom.

    Reply this comment
  15. Tough Love
    Tough Love 6 June, 2013, 15:53

    Wayne, Want a REAL solution … (notwithstanding the legal complications) aggressively advocate for significant (50% minimum) reductions in the pension accrual rate for FUTURE service of ALL Current Public Sector workers.

    That and a VERY significant reduction in retiree healthcare “promises” for CURRENT and retired workers just MIGHT save CA.

    Doing less, lowers that probability very materially.

    Reply this comment
  16. eatingdogfood
    eatingdogfood 6 June, 2013, 18:04

    If The Democrats Didn’t Give ” Sweetheart Deals ” To Your Public Service Union.
    Goon Employees To Get Reelected; You Would Have Plenty Of Money and The.
    Taxpayer would have Some Spare Change in His Pockets! Democratic Hustler
    Politicians + Corrupt Union Goons = BANKRUPTCY BABY! Time To Bring.
    RICO Conspiracy Charges Against The Hustler Corrupt Democrats and the.
    Criminal Unions!

    Reply this comment
  17. Ulysses Uhaul
    Ulysses Uhaul 6 June, 2013, 19:53

    CWD is fly paper for some disturbed doomers…..unfortunate……black days and gargoyles….go for it!

    Reply this comment
  18. SkippingDog
    SkippingDog 6 June, 2013, 20:02

    Tough Love – The “legal complications” you blithely dismiss negate any claim you might make about having a “REAL solution.”

    The other term for “legal complications” is “the law.” No court is ever going to just disregard it for the sake of your philosophical convenience.

    Reply this comment
  19. Tough Love
    Tough Love 6 June, 2013, 20:27

    Skippy, Perhaps not, but Realty, and the impossibility of the Math … WILL.

    Reply this comment
  20. SkippingDog
    SkippingDog 7 June, 2013, 09:04

    Even if you believe Whitney, TL, she doesn’t share your view of the future:

    “When questioned whether California would go broke, Whitney answered, “If they go broke, it’s going to take a really, really long time.” She called California “the most dysfunctional political environment in the country.” The state will keep getting weaker and weaker each year until it has to start “selling down” assets.”

    Reply this comment
  21. Donkey
    Donkey 8 June, 2013, 06:43

    Skdog, and that is all you care about, letting California die a slow death so you can keep your ill-gotten gains. Instead of admitting the RAGWUS has gone too far in raping the taxpayers of this state and help find a solution, your only concern is keeping what you have been able to steal. And that is where we are today, the point where the feeders that have are sticking it to everyone else, even the feeders that follow. 🙂

    Reply this comment
  22. Ed the Independent Contractor
    Ed the Independent Contractor 8 June, 2013, 09:40

    Your comments would be a great deal easier to follow if you would stop using terms like RAGWUS. What does that mean? I assume that it means something with regards to tax and spend democrats.
    I interact with people all the time and I find that the rank and file state employees are not getting rich on pensions. The public safety folks are hogging the trough. In recent days, I met a retired fire captain who gets $187,000/yr in pension. This is ridiculous. This person would have an appropriate pension at about half that amount. Plus all his and his spouses medical costs for life are free. I’ve met prison guards, not management who are receiving $90,000/yr in pension. Jerry Brown certified the public employee unions in the 1970s and it has all been downhill from there. The incestuous relationship of the Democratic politicians getting the support and funding of the public employee unions then turning around and approving new contracts for the unions. No new contracts no money for the Democratic candidates and the measures they approve. This is now a death spiral. It is just a matter of time until it collapses.

    Reply this comment
  23. SkippingDog
    SkippingDog 8 June, 2013, 15:47

    Ed – While there are certainly pension spiking abuses, I’d love to see the real numbers on the fire captain you cite in your post. If his agency was part of CalPERS or most of the 1937 Act agencies, he can’t spike his pensionable income through overtime or leave conversions. There are a few counties and cities where this has been possible, but even they are taking steps to make sure it doesn’t continue.

    As to your claim about Jerry Brown and public unions, most public employees in California are municipal and county employees such as police officers, fire fighters, sheriffs deputies, planning directors, city managers, clerks, etc. Those groups received the right to form unions and bargain collectively for wages, hours, and working conditions in 1969, when Governor Ronald Reagan signed the Meyers-Milias-Brown Act into law.

    State employees were given the same right of collective bargaining a few years later when Gov. Jerry Brown signed the Dills Act and HEERA (for teachers) into law.

    Even Ronald Reagan supported the right of your local public service employees to form unions and bargain for their salary and benefits. It good to have an accurate understanding of history.

    Reply this comment
  24. The Ted Understanding Machinees
    The Ted Understanding Machinees 8 June, 2013, 17:47

    Lol. Yes skip, Merideth is an infamous predictor! Pretty much about as accurate as old Rex the poodle before her name change! 0 for 14 ™ !

    Reply this comment
  25. Ulysses Uhaul
    Ulysses Uhaul 8 June, 2013, 19:58

    Donkey has been preaching slow death slow death. Gloom……..oh my……Drats! When is the doomsday already…Brown and Perez say we are in tip top shape…….

    Reply this comment
  26. Donkey
    Donkey 8 June, 2013, 23:37

    Ed the Independent Contractor, RAGWUS: Robert Rizzo And Government Worker Union Scam.

    Skdog, you know that the Union Bill Ronald Reagan signed was written during and passed while Jerry’s dad was governor. Sure Reagan signed the bill, mayber he knew what was in it, and then again maybe not, but we do know that he would not have put up with the greed that has taken place in the last 25 years, you can ask the air traffic workers how Reagan felt about government feeders misbehaving.

    UU, it is a slow death, death by a thousand cuts, but with each cut the speed is increasing. 🙂

    Reply this comment
  27. The Ted Methodologies
    The Ted Methodologies 9 June, 2013, 14:13


    Ragas has two r’s in it?

    Is that for Ronald Reagan?

    Reply this comment
  28. SkippingDog
    SkippingDog 9 June, 2013, 20:52

    Reagan was elected Governor in 1966 and signed the MMB legislation in 1969. Edmund Brown Sr. had nothing to do with it, Donkey. Legislation didn’t sit around for three years, even in those days.

    Reply this comment
  29. SkippingDog
    SkippingDog 9 June, 2013, 21:11

    One other point, Donkey, before I retire for the evening. When the air traffic controllers of PATCO went on strike, they all knew they were engaging in a clearly illegal activity that would likely be used to terminate them from federal service. They were repeatedly warned about the consequences of their action before they decided to ignore those warnings and engage in an unlawful strike.

    No rational person believes that essential government personnel should be able to engage in strike behavior to achieve their labor goals. I have never believed anyone who performs essential safety services, such as law enforcement, fire suppression, or medical response, should have the right to engage in strike actions, and our laws reflect that prohibition as well.

    On the other hand, for all of his posturing about “government being the problem,” Ronald Reagan expanded the government more than any of his predecessors. He also signed the legislation that gave amnesty to millions of aliens illegally in the country and really did double our national debt during his presidency.

    Reply this comment
  30. Steve Hart
    Steve Hart 17 June, 2013, 06:07

    Comparing moves in GDP between gigantic California and tiny Louisiana? Really? This now passes as cogent economic analysis these days?

    Reply this comment

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