A continuation of the analysis of the current situation in Illinois by WirePoints:
Fact 4
14. Core services crowded out. By 2015, Illinois was already the extreme outlier nationally when it came to retirement costs and budget crowd out. Those costs consumed more than 20 percent of the Illinois’ general budget, crowding out everything from education to health care to infrastructure. In contrast, Illinois’ neighbors, with the exception of Kentucky, used far less than 10 percent of their budgets for retirement costs.
Illinois: https://downtrend.com/wp-content/uploads/2014/12/Black-Gangs-Attacking-Whites-Bosnians.jpg
The chart references a JP Morgan document named, The ARC and the Covenants 2.0 which was published 2016).
That document has a predecessor and has since been updated twice.
The ARC and the Covenants (2014)
The ARC and the Covenants, 3.0 (2017)
The ARC and the Covenants, 4.0 (2018)
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A brief explanation of the series.
ARC = actuarial required contribution
A covenant is an agreement.
The series is about the annual contributions as a percentage of annual state revenues, that a state would have to make for bond interest (does not include bond principal?), pensions, and OPEB.
In the case of pensions and OPEB, at 6% interest for 30 years (at which point they would be 100% funded?).
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The ARC and the Covenants series thus analyzes each state’s ability to meet a JP Morgan debt stress test.
Importantly for pensions and OPEB, the stress test uses the level dollar (not level percent) amortization method.
An explanation of that follows.
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GASB
“Amortization method
Under GASB 75, there are two acceptable accounting methods for amortizing the present value of future benefit costs over a period of time.
The methods are:
(1) Level Dollar, which amortizes the cost into equal dollar amounts to be paid over a given number of years, and
(2) Level Percentage of Payroll, which calculates amortization payments as a constant percentage of projected payroll over a given number of years.
Level Dollar amortization generally results in decreasing inflation-adjusted payments over time,
whereas Level Percentage of Payroll amortization generally results in level inflation-adjusted payments over time.”
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Thus level dollar more closely resembles a fixed rate mortgage.
Level percentage of payroll more closely resembles an adjustable rate mortgage with ever increasing payments.
That’s a rough generalization.
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Back to the Arc and the Covenant 4.0 paper.
Compared to the other states, Illinois ranks highest.
The State of Illinois unit of government (does not include local pensions & OPEB) would have to make the highest payments for bond interest, pensions, and OPEB, as a percentage of state revenues.
In other words, Illinois is at the bottom of the barrel in this stress test.
And thus Illinois leads in the percentage of state revenues that would be required to annually service state debt and unfunded liability obligations.
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Following are the documents
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JP Morgan
Eye on the Market
The ARC and the Covenants 4.0
The State of the States, 2018
by Michael Cembalest
http://www.jpmorgan.com/jpmpdf/1320746272624.pdf
supplementary materials
jpmorgan.com/directdoc/ARC4_SM.pdf
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The ARC and the Covenants 3.0
Executive Summary
jpmorgan.com/jpmpdf/1320743902761.pdf
Full Report
jpmorgan.com/directdoc/ARC4_SM.pdf
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The ARC and the Covenants 2.0
May 19, 2016
jpmorgan.com/jpmpdf/1320702681156.pdf
Supplement
jpmorgan.com/directdoc/ARC2supplementalmaterials.pdf
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The ARC and the Covenants
June 5, 2014
jpmorgan.com/jpmpdf/1320668288866.pdf
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Wirepoints initial coverage of the series
wirepoints.org/a-must-read-pension-analysis-the-arc-and-the-covenants