After Puerto Rico’s collapse, is your city or state next?
Which state or city is most likely to follow Puerto Rico’s example, and beg Congress for a legal mechanism to get out of its crushing bond and pension debts?
A detailed new study from the Mercatus Center at George Mason University gets us part of the way to an answer.
Puerto Rico’s finances are uniquely terrible, according to this study of state finances, ranking dead last in five major measurements of long- and short-term solvency. But the worst-run states are much closer to Puerto Rico’s condition than they are to states with balanced budgets and reasonable debt.
With short-term budget troubles and colossal long-term debt, Kentucky, Illinois, New Jersey, Massachusetts, and Connecticut, in particular, are much closer to the basket case economic condition of the Caribbean territory on the Mercatus fiscal health index than they are to states such as Texas, the Dakotas, Florida, or Nebraska, where budgets are balanced and public pension systems may yet be salvaged.
For example, Connecticut, which ranks 50th out of the states for fiscal health, has run up $67 billion in debt, compared to Puerto Rico’s $118 billion, while both have populations of around 3.6 million. But personal income in Puerto Rico is less than one-third of Connecticut’s. If that seems reassuring, consider that the Nutmeg State’s debt figure grows to $124 billion if you recalculate pension debt, assuming it will all be paid — an assumption one no longer makes for Puerto Rico, which gave up on funding its pension system a decade ago and is now just draining the balance.
The sliver of good news for the states ranking at the bottom of the study, written by Eileen Norcross and Olivia Gonzalez, is that they may be just wealthy enough to afford the inevitable tax increases headed their way.
The study weights current budget troubles much heavier than long-term financial problems, but even so, those same states tend to show up at the bottom.
The bottom 10 states on the overall rankings – Maryland, New York, Maine, California, Hawaii, and the five states mentioned above – all have Democratic majorities in their legislatures. The top 10 states – Alaska, Nebraska, Wyoming, North Dakota, South Dakota, Florida, Utah, Oklahoma, Tennessee, and Montana – all have Republican majorities. But heavy debt and fiscal health have both been developed over many years, through administrations of both parties in most states.
Since all 50 states strive – with varying degrees of vigor – to run their affairs on a balanced budget, and they are also forbidden by federal law from declaring bankruptcy, states are less likely than individual cities to be following Puerto Rico into insolvency, at least in the near term.
Local governments are much more likely to try shirking their debts. Even in healthy states, a rogue agency can get into Puerto Rico-level trouble. For example, Texas, which is the picture of fiscal health at the macro level, is speckled with jurisdictions incapable of managing their money.
There are 18 school districts in Texas that – all by themselves – have run up bond debt per capita in excess of the $20,366 per person that Puerto Rico has created. These tend to be small districts – 6,200-resident Prosper ISD, with bond debt of $43,578 per person, or 8,608-resident Spring ISD, with $63,934 – but even massive Texas districts can get almost halfway to Puerto Rico-level debt on their own. Frisco ISD outside of Dallas owes $9,416 in bond debt for each of its 185,000 residents. Northwest ISD in San Antonio owes $7,169 for each of the 106,780 people within its borders.
So the next local bankruptcy could from anywhere, but it’s very likely to come from one of the 10 most troubled states, as identified by Mercatus. So we started there, then added in statewide local debt figures from the Census, to see who was in the neighborhood of Puerto Rico’s total debt figure of $33,224 per person (that’s general debt plus pension debt plus retiree health care obligations).
For the cities that maintain their own pension systems, we added in their specific debts, using guaranteed-to-be-paid numbers recently calculated by Prof. Joshua Rauh at Stanford University for most, and a rule-of-thumb actuarial estimate for two others. These numbers do not include pension debt for most county and small local agencies.
It’s worth keeping in mind that personal income stateside is about 2.5 times higher than in Puerto Rico, and the ability to repay debts is correspondingly greater.
We knocked Maine off the list right away, as it made the Mercatus Bottom 10 owing only to some short-term cash troubles. Its debts aren’t that bad, relatively speaking.
At No. 9, we’ve got Louisville, although most of Kentucky faces the same risk. The state and local debt load per capita in Kentucky is $26,600, and the radically underfunded state pension system (44 percent funded by conventional measure) creates a huge strain on member governments. Louisville has paid what was asked of it, but those amounts were always too small.
At No. 8, we’ve got Baltimore, where residents carry a combined state and local debt load of $27,500, with $7,000 of that just for city pensions.
At No. 7, we’ve got Boston, with $29,600 in state and local debt per capita, including $6,700 for local pensions, but not including some $5 billion the city owes for retiree health care.
At No. 6, we’ve got Bridgeport, Connecticut, with some $37,300 in combined debt, like the rest of the state, whose finances were ranked worst by Mercatus. However, the state legislature just passed an amendment allowing the city to postpone pension payments for six years, a respite that is both a sign and a cause of disaster.
At No. 5, we’ve got Honolulu, representing Hawaii, where folks labor under $37,800 in debt. The state doesn’t just have budget problems in the near term and debt problems in the long-term, it doesn’t have much room to raise taxes to pay for them.
At No. 4, we’ve got New York City, which has whopping debts of $46,400 per capita. Some $15,500 of that comes just from the city’s pensions. Despite unfathomable unfunded liabilities of $131.5 billion in the city system (using risk-free rates), the city’s tremendous wealth keeps the behemoth from collapsing. Also, New York is much more aggressive than any other major city in setting aside (nearly) enough money in the budget to keep the system viable. So New York’s probably not the fourth most likely city to become a disaster, but we’ve been sticking to the numbers.
However, at No. 3, we’re going to cheat just a bit, and mention four cities from California: San Jose, San Diego, San Francisco, and Los Angeles. This is not to say they’re tied. San Diego has started digging itself out of the hole, and San Jose has tried, but found itself thwarted by state officials. The statewide average for state and municipal debt is $30,200, but that doesn’t tell the whole picture. San Francisco and Los Angeles almost certainly have debt per capita figures north of $40,000, although we haven’t disentangled their debts from the state pools. Rauh’s estimates for pension debt alone for San Francisco and Los Angeles work out to $14,141 and $9,152, respectively, although Los Angeles County’s $35.5 billion in unfunded liability would put it roughly on par. That’s about triple the local pension debt of San Diego and San Jose, which are better known for their pension troubles. Both San Francisco and Los Angeles owe $5 billion or more for retiree health care, as well.
At No. 2, we’ve got Jersey City, which has its own local pension disaster to pair with the state’s pension nightmare. The $4,800 or so that residents owe for the local system on top of all their other state and local debts comes out to debt of $41,800. The problem is a statewide failure, though one that’s produced New York levels of debt without a New York economy.
At No. 1, with no drumroll at all necessary, comes Chicago, with $56,900 in state and local pension debt. You could throw in half of Cook County’s $16 billion pension debt. Actually, this doesn’t even include tens of billions of dollars in pension debt for the Transit Authority, the Water Reclamation District, and a handful of other independent agencies that would make comparisons difficult. But that debt would put the figure upwards of $70,000 per capita. It represents debt Chicagoans will be paying, at least until they give up and move. The abyss grows ever wider. A study by Rauh in April found that aside from a broken school district in St. Paul, the worst local agencies in the country for contributing to their pension funds were the city of Chicago and Chicago Public Schools. Just to keep the hole from getting bigger, the city would need to spend 32 percent of its revenue on pensions; it’s actually dedicating 7.5 percent. Chicago Public Schools would have to spend 56.5 percent of its revenues on pensions; it’s actually contributing 20.3 percent. The difference goes on the card.
Neither the city of Chicago nor its school district has the money to pay its bills, and the depth of its debt makes that unlikely to change, absent some sort of radical restructuring, one that could take cues from Puerto Rico.
These cities, of course, aren’t the only ones in trouble. From Portland, Oregon, to Omaha, Nebraska, there are cities in otherwise healthy states that have gotten into pension trouble.
Special mention should be made of Ohio, which looks fine in the short-term, thanks to a budget balanced by tapping future revenues. Long term, Ohio doesn’t much resemble the picture painted by Gov. John Kasich during his abortive presidential campaign. It has $295.7 billion in combined bond, pension, and retiree health care obligations, and no plan to pay it off. There’s no reason Cleveland or Cincinnati couldn’t join the list of failed cities somewhere down the line.
Even in Texas, which prides itself on small government, there’s reason to worry, and not just because of those indebted school districts. Rauh’s study ranks cities by how many times bigger their pension debt is than their annual revenues. Chicago is first, of course, followed by Detroit. But the next three are Dallas, Houston, and El Paso.
Contact Jon Cassidy at email@example.com or @jpcassidy000.