We harp on the massive, unsustainable, yet largely unnoticed, debt burdens of American cities, counties and states fairly regularly because, well, it’s a frightening issue if you spend just a little time to understand the math and ultimate consequences. Here is some of our recent posts on the topic:
- America’s Pension Bomb: Illinois Is Just the Start
- Stanford Says Soaring Public Pension Costs Devastating Budgets For Education And Social Services
- Pension Consultant Offers Dire Outlook For Kentucky: Freeze Pension And Slash Benefits Or Else
Luckily, for those looking to escape the trauma of being taxed into oblivion by their failing cities/counties/states, JP Morgan has provided a comprehensive guide on which municipalities haven’t the slightest hope of surviving their multi-decade debt binge and lavish public pension awards.
To add a little context to the map above, JP Morgan ranked every major city in the United States based on what percentage of their annual budgets are required just to fund interest payments on debt, pension contributions and other post retirement benefits.
The results are staggering. To our great ‘shock’, Chicago residents win the award of “most screwed” with over 60% of their tax dollars going to fund debt and pension payments. Meanwhile, there are a dozen municipalities where over 50% of their annual budgets are used just to fund the maintenance cost of past expenditures.
As managers of $70 billion in US municipal bonds across our asset management business (Q2 2017), we’re very focused on credit risk of US municipalities.
The chart below shows our “IPOD” ratio for US states, cities and counties. This measure represents the percentage of a municipality’s revenues that would be needed to pay interest on direct debt, and fully amortize unfunded pension and retiree healthcare obligations over 30 years, assuming a conservative return of 6% on plan assets. While there’s no hard and fast rule, municipalities with IPOD ratios over 30% may eventually face very difficult choices regarding taxation, non-pension spending, infrastructure investment, contributions to unfunded plans and bond repayment.
Anyone else feel like the winters in South Dakota are suddenly looking much more manageable…
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