Puerto Rico Is Greece, & These 5 States Are Next To Go

Tyler Durden's picture




 

As Wilbur Ross so eloquently noted, for Puerto Rico "it's the end of the beginning... and the beginning of the end," as he explained "Puerto Rico is the US version of Greece." However, as JPMorgan explains, for some states the pain is really just beginning as Municipal bond risk will only become more important over time, as assets of some severely underfunded plans are gradually depleted.

Wilbur Ross discusses Puerto Rico's debt struggles and where it goes from here...

 

But, as JPMorgan details, Muni risk is on the rise for US states, but broad generalizations do not apply (in other words, these five states are 'screwed')...

The direct indebtedness of US states (excluding revenue bonds) is $500 billion.  However, bonds are just one part of the picture: states have another trillion in future obligations related to pension and retiree healthcare.  In the summer of 2014, we conducted a deep-dive analysis of US states, incorporating bonds, pension obligations and retiree healthcare obligations.  After reviewing over 300 Comprehensive Annual Financial Reports from different states, we pulled together an assessment of each state’s total debt service relative to its tax collections, incorporating the need to pay down underfunded pension and retiree healthcare obligations. 

While there are five states with significant challenges (Illinois, Connecticut, Hawaii, New Jersey, and Kentucky) , the majority of states have debt service-to-revenue ratios that are more manageable.

As a brief summary, we computed the ratio of debt, pension and retiree healthcare payments to state revenues.  The blue bars show what states are currently paying.  The orange bars show this ratio assuming that states pay what they owe on a full-accrual basis, assuming a 30-year term for amortizing unfunded pension and retiree healthcare obligations, and assuming a 6% return on pension plan assets.  States below the green bar are spending less than 15% of total revenues on debt, which seems manageable from an economic and political perspective.  When this ratio rises above 15%, harder discussions in the state legislature about difficult choices begin.  

 

 

It would take a long time for underfunded pension plans (e.g., 60% funded) to run out of cash, given the long duration of plan liabilities.  But as investors learned in Puerto Rico and Greece, bond markets can drift along unconcerned with mounting fundamental problems, only to experience a rapid repricing at times that cannot be predicted.  As a reminder, this analysis applies to states and not to city, county and other in-state issuers.

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Sun, 01/03/2016 - 23:43 | 6993723 uhland62
uhland62's picture

I saw an ad in a Melbourne (Australia) newspaper where they said they had successfully gentrified in the States and now wanted investors for doing the same in Australia. In a book called 'the laundrymen' I once read that half the world's economy is 'black' and if that were completely plugged it would all go pop. Maybe that's how they afford those 6/7 for the beer. 

The whole system has grown piecemeal and is not well designed. Some of the retirment incomes are truly shocking and I have seen that in Germany also.

There is a big problem that work can never pay so well that you can afford your own sufficient health insurance and accumulate enough capital for your old age plus buy a car and an apartment or house. Even when you decide not to have children there won'te be enough for all that. Roll that over to the employing authorities and you get unfunded liabilities. Where exactly do people think it's all supposed to come from? Either wages must be high enough to fund it all, or the governments must have enough income sources .  

Ukraine has already defaulted and it will be contagious like Wall Street Disease of 2008.

Sun, 01/03/2016 - 21:38 | 6993204 V for ...
V for ...'s picture

Sovereign defaults will be the big story of 2016, imo.
End the Fed.

Sun, 01/03/2016 - 22:05 | 6993331 silverer
silverer's picture

Illinois made the top?  Imagine that.  Such a well run state.  I'll bet that anyone who ever served a leadership public position in the past in Illinois is doing just fine.  You know the typical group:  Governors, mayors, school administrators, etc..

Sun, 01/03/2016 - 22:19 | 6993390 highwaytoserfdom
highwaytoserfdom's picture

Wilber you are a total Peice of Shit.... Take your MERS and stick a fraud up you ass. How's that 85 B in sub slim and Greek debt going.. You crony FHFA piece of dog crap STFU...  Oh thanks for Invesco keep it up beautiful short....

Sun, 01/03/2016 - 22:25 | 6993424 RSDallas
RSDallas's picture

Meredith Whitney was right, but, none of us could have imagined that the Fed could have kept the heroine high for as long as it did. Well the heroine is wearing off quickly.

Sun, 01/03/2016 - 22:49 | 6993534 Seasmoke
Seasmoke's picture

PAY AS YOU GO !!!!!!!

Mon, 01/04/2016 - 02:01 | 6994085 Kprime
Kprime's picture

Illinois,  "Give us your property or leave, or stay we will still take your property".

Sun, 01/03/2016 - 22:59 | 6993561 Secret Weapon
Secret Weapon's picture

Fuck Illinois.

Mon, 01/04/2016 - 01:06 | 6993920 JamaicaJim
JamaicaJim's picture

The Land of Stinkin

Mon, 01/04/2016 - 01:06 | 6993924 JamaicaJim
JamaicaJim's picture

The Land of Stinkin

Sun, 01/03/2016 - 23:09 | 6993603 Yen Cross
Yen Cross's picture

 The RATS are bailing off the lower stern...

 Rare pigmie banksters, have been sighted.

 Excuse me while I take out the trash... Bitchez

Sun, 01/03/2016 - 23:13 | 6993619 yogibear
yogibear's picture

NJ.,Paying almost 9K a yr. in property tx on a home worth 380K

In Illinois it's just as bad and they want to raise taxes again.

Would have to say that Illinois is the worst state regarding taxes and public union power.

https://turbotax.intuit.com/tax-tools/tax-tips/General-Tax-Tips/Cities-W...

Chicago, Illinois: 10.25 percent (starting Jan 1, 2016)
Birmingham and Montgomery, Alabama: 10 percent
Seattle, Washington: 9.6 percent
Glendale, Arizona:, 9.5 percent

Mon, 01/04/2016 - 03:30 | 6994189 kappal_toba_dhu...
kappal_toba_dhurr_ne_thook's picture

Deekra, 9k in NJ is a bargain.  we used to pay about 13k for a small home in Edison.  So glad to be out of there!

But yes, NJ is in a horrible state and definitely oneof the next new  4th world countries if it were a country. 

Sun, 01/03/2016 - 23:16 | 6993630 danl62
danl62's picture

Illinois is really screwed up. You can thank the Democrats for giving the state public unions the sweetheart deal that will never be able to be repaid. Here are some stats from Illinois. A techer who retired in fiscal year 2014 after 30 or more years on the job could expect an initialaverage annual pension of 72,693. Remember that is initial. They also get COL. Try getting mthat in the private sector.

http://www.taxpayersunitedofamerica.org/wp-content/uploads/Top200Grids-2...

Sun, 01/03/2016 - 23:17 | 6993638 brown_hornet
brown_hornet's picture

I pay $6,000 on a house worth about $220,000 18 mi west of the Loop. And mine are reasonable for the area. Many teachers making more on pension than they did while working. That what cannot be sustained won't be.

Sun, 01/03/2016 - 23:27 | 6993666 InnVestuhrr
InnVestuhrr's picture

Before the crash of 2008 I managed a large portfolio of muni bonds, including all uses, GOs and revenue.

Now I hold only a much smaller number of only revenue muni bonds, in small amounts per issue, for only very carefully meticulously researched uses that have very low probability of default, eg essential utilities like water, sewer, electricity, etc.

The extreme shortage of quality muni bonds and the crushing amount of expensive due-diligence research required on each issue prior to buying makes buying munis prohibitively risky and expensive.

Many of the GOs (especially IL,CT,NJ,HI, KY) and risky-usage revenue bonds (eg low-income housing,"development", etc) do not have 30 years of solvency and will have to be restructured with big losses to owners.

Mon, 01/04/2016 - 08:40 | 6994653 Agstacker
Agstacker's picture

But you don't hold gold, do you?  :)

 

LOL

Mon, 01/04/2016 - 08:59 | 6994731 InnVestuhrr
InnVestuhrr's picture

Not even 1 atom :-))

Mon, 01/04/2016 - 13:52 | 6996122 1Inthebeginning
1Inthebeginning's picture

Articulate intelligent comments.  Gives me an alternative point of view to mull over.  Happy for any one that is challenging and gets me to think.  Scientific method!!!! 

Sun, 01/03/2016 - 23:27 | 6993669 Jackagain
Jackagain's picture
Record Federal Reserve auction suggests more problems for credit, mutual funds in 2016

http://finance.yahoo.com/news/-475-billion-year-end-fed-auction-suggests...

Sun, 01/03/2016 - 23:48 | 6993741 Yen Cross
Yen Cross's picture

 Peurto Narco... lol

Sun, 01/03/2016 - 23:50 | 6993747 lasvegaspersona
lasvegaspersona's picture

-he he ...he said 6%...good laugh. This ain't 2004 buddy. Where are you going to get a 6% return?...Illinois bonds?

Mon, 01/04/2016 - 01:54 | 6994064 Kprime
Kprime's picture

I think Venezuela is offering above 6%, hee hee

Sun, 01/03/2016 - 23:54 | 6993760 Yen Cross
Yen Cross's picture

 The highly challenged, State Pension Plans, chart is beautiful.

 Nice decending LEFT to RIGHT, pension-isms.

  Long toll boothers!

Sun, 01/03/2016 - 23:57 | 6993769 NoYouAreAnAsshole
NoYouAreAnAsshole's picture

The important and fallacious aspect of this article is this, "and assuming a 6% return on pension plan assets."  Our government has gone to a great deal of time and trouble to ensure that our banks are not to big to fail.  That has mostly come about by ensuring that they carry a lot more cash or cash equivalents than they had to carry in the past.  All well and good.  

However, what we have failed to do is the same of the assets that are the firewall between "getting by" and poverty for retired government workers. One of the reasons that this was not and is not thought of in the same light as our banks is because right in the middle of the 2008 crisis a fix was being crafted.  That fix was the near trillion dollar infusion that was was billed as  "infrastructure" spending.  Of course, little was actually spent on infrastructure in the classical sense - fixing roads, bridges and other public structures.  What instead was shored up was the steaming pile of crap that was and still is the pension and medical safety nets for our retired government employees.  And, because the need did not seem to have emerged as it should have not in small part because of this huge infusion of cash, we find ourselves at what may be another crossroad. 

That crossroad is the juncture of rosy projections of 6% returns at the end of one of the longest bull markets of any century.  If we do in fact go into recession or even if we experience a few years of flat stock market prices like we just experienced, you can kiss off the above projections 

What needs to be done - and it will no doubt be done - is shoring up these funds at painful taxpayer expense.  But that will just be a band aid.  What really needs to be done is first and foremost get government entities out of the business of providing retirement and medical programs for retired employees. 

If you have worked at all in business the last 20-30 years, what you have undoubtedly given up is a defined benefit program for a 401-k and, if it existed at all, any safety net whatsoever regarding a medical program.  The same should hold true for government employees.  No other solution will actually solve this issue - unless you call throwing good money after bad at ever greater quantities while encouraging the most rank corruption of politicians at whatever the level a solution. 

 

 

Mon, 01/04/2016 - 03:31 | 6994190 Clowns on Acid
Sun, 01/03/2016 - 23:58 | 6993770 NoYouAreAnAsshole
NoYouAreAnAsshole's picture

double post - -

 

 

Mon, 01/04/2016 - 00:18 | 6993818 Yen Cross
Yen Cross's picture

 Ahh -hahh?

 I'm going to fire -up some charts, for you.

 You're supposed, pension plan? lol

 Say hello to that dipshit Mayor of New Iran.istan....

Mon, 01/04/2016 - 00:22 | 6993829 jcdenton
jcdenton's picture

I do wish ZH would truly, honestly, completely, and entirely look into the whole story ..

The Senate approved this debt reduction plan and this week the House will vote on it. Lee Wanta is also in the process of assisting the Hellenic Republic of Greece with a reliable financial assistance program to help them with their National debt obligations.

 

I'm sure the same goes for PR in due time ..

Ambassador Lee E. Wanta to reduce the National Debt

December 17th, 2015

 

So much fear porn based on incomplete research, is quite frankly pathetic ..

It is also irresponsible journalism ..

Mon, 01/04/2016 - 03:18 | 6994175 JPMorgan
JPMorgan's picture

Would that be along the same kind of lines as the debt reduction and restructuring plan that the US is under taking?

Mahahahahaha' then Puerto Rico really is fucked.

Mon, 01/04/2016 - 09:07 | 6994745 Backin2006
Backin2006's picture

My faith in the US politician class would be restored if one - just one - of the states were sitting on a big cash pile so large that they had to open their own sovereign wealth fund. Ah well...

Mon, 01/04/2016 - 01:43 | 6994030 Falling Down
Falling Down's picture

Bitch pleez.

NY will be in the top five when the markets collapse.

Mon, 01/04/2016 - 02:20 | 6994117 22winmag
22winmag's picture

Maybe those Puerto Rican terrorists (freedom fighters?) that Clinton pardoned will make a resurgence.

Mon, 01/04/2016 - 08:37 | 6994636 dltff-ya
dltff-ya's picture

will the govt cut back sociakl security this year? could they do that without gomer old people riots?

I am really serious     wondering about that ,. They rules about spouse  bernefits could ber changed to prevent both hsband and wife from collecting. Is social security  really in dnager?

Mon, 01/04/2016 - 09:53 | 6994954 NuYawkFrankie
NuYawkFrankie's picture

Just thank your lucky stars that Hillary's waiting in the wings to clean-up this mess.

Mon, 01/04/2016 - 11:34 | 6995425 Flankspeed60
Flankspeed60's picture

There is very little question that fed. govt. employees, and most state and locals, enjoy far better perks than their private, small business counterparts who must compete with them. Can’t fault folks, whether immigrants or workers, for following the incentives crafted by self-serving politicians over the decades. But these workers have become powerful, deeply entrenched liberal voting blocs - esp. the fed Civil Service. Add to that the misery induced by NIRP and Zirp, and the unfunded pension liabilities are a natural. Einstein remarked that “No major problem can be resolved on the same plane of consciousness that created it.”  We should seriously consider term-limiting all govt. employees (including politicians) to 8 yrs. Pay into a 401k-like plan at the same rate as the average of all small businesses, and terminate/transfer when the employee leaves. Same for health care benefits.

This would enable 4 major accomplishments: Accumulated pension liability would disappear, the entrenched, immovable, empire building bureaucracy would be greatly diminished, small businesses would instantly be more competitive, and more citizens would become more aware of the waste and fraud within the govt. with fewer reasons to defend or hide it. One might also add the reduced resentment between private and public sector workers, and the potential for more fresh ideas unburdened by a seniority vs. merit-based system. It would be a start.............

Mon, 01/04/2016 - 21:26 | 6998086 SmittyinLA
SmittyinLA's picture

CA not on list, can't be an accurate list

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