Outside the Box: These U.S. states are putting their bond investors in a world of hurt

Investors in state bonds, beware. Four U.S. states — Illinois, New Jersey, Hawaii, and Connecticut — are sitting on time bombs. Between 35% and 51% of their annual revenues are likely to be needed to meet their total annual payment obligations on existing debt, retirement plans, and retiree healthcare. Yet the general obligation (GO) bonds of New Jersey, Hawaii, and Connecticut have a single A-rating from both Moody’s and S&P Global; the GO bonds of Illinois still have an investment-grade rating of triple-B.

Look at the table below, which compares two calculations of the current payment obligations for these four states as a percentage of state revenues — the first as reported by the states for fiscal year 2017; the second as calculated by Michael Cembalest and the Investment Strategy Team of JP Morgan Asset Management with more realistic assumptions.

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