Predictions of an “imminent fiscal meltdown” among U.S. states and municipalities are exaggerated and create “unnecessary alarm” for policymakers, the Center on Budget and Policy Priorities said in a report.
The operating deficits most states are forecasting for fiscal 2012 are the result of the weak post-recessionary economy and have been erroneously conflated with longer-term issues such as pension obligations, Iris J. Lav, senior adviser at the research group, and Elizabeth McNichol, a senior fellow, said in the report issued Thursday.
“Overheated claims about state and local budget problems not only are inaccurate, but also could lead policymakers to take unwise steps such as allowing states to declare bankruptcy or forcing them to change the way they report their pension liabilities as a condition for issuing tax-exempt bonds,” Ms. Lav said in a news release accompanying the report’s release.
U.S. states will confront deficits totaling $140 billion in the next fiscal year, according to a Dec. 16 report from the center.
Municipal bond defaults are “extremely rare” at less than one-third of 1%, the center said in the report, citing calculations by the three major rating firms. Most defaults are on bonds to finance housing or hospital construction, and reflect problems with those projects, not the fiscal health of the local government.