By Iliya Atanozov, includes “a recent report by JP Morgan’s Michael Cembalest provides a fresh look at the problem of state indebtedness. Cembalest, global head of investment strategy, is best known for his writings on housing and for flagging Bernard Madoff’s fund and refusing to invest in it, even while other divisions at JPMorgan gleefully did so. Cembalest looks at state governments’ annual payments towards bonded debt interest and retirement liabilities (defined-benefit and defined-contribution pensions as well as retiree healthcare benefits) expressed as percentage of total annual revenue. In addition to assessing states’ default risk, this approach quantifies exactly how much debt expenditures are crowding out investments in education, infrastructure and other strategic priorities. Here are three key outtakes: 1) Most states don’t make even the pension contributions required by their own backloaded and overly optimistic funding plans, often by a wide margin. 2) Under a plan with level payments and a 30-year funding term, nearly half the states would need to contribute at least 10 percent of revenue towards their liabilities. 3) Even the worst undercontributors typically already pay more towards pensions alone than they do on bond interest. …”
Read the full article on: Public Sector Inc.