For some time prior to the bond default, concerns with Puerto Rico's credit began to surface with high levels of debt and mounting unfunded liabilities of its employee pensions systems. These unfunded pension liabilities served to magnify the Commonwealth's already hefty public indebtedness. Puerto Rico is now faced with $72 billion of unpaid bonds, plus $33 billion of unfunded pension liability, or $105 billion in total obligations. For an island with only 3.5 million people, that's $30,000 per capita.
What bond investors are now beginning to realize is that pension liabilities are tantamount to debt. They must be weighed equally in evaluating the level of government debt burden and its capacity to repay its obligations. This concern was highlighted by the outcomes of recent U.S. municipal bankruptcy cases, where public bondholders were paid as little as 12 cents on the dollar, only to see retirement obligations of the local government paid in full. This turn of events has the effect of investors not only recognizing that pension obligations are debt, but debt that may also be a superior obligation, to be paid first in a time of financial crisis.
This has us thinking about some more highly rated municipal credits, like New Jersey and the State of Illinois, and what their true debt burdens might be, considering unfunded pension liabilities. New Jersey, fortunately, fairs a little better than Puerto Rico, with $84 billion of State public debt and $87.6 billion of unfunded pension liabilities, or $171 billion in combined debt overall. Spread over 8.9 million residents, New Jersey total debt per capita is on the order of $19,000.
For Illinois, with $127 billion of bonds outstanding, debt burden is considered "moderate" by the bond rating agencies. But adding $167 billion of unfunded pension liabilities, brings their total amount due to creditors to a whopping $294 billion. Measured on a per capita basis, this ranks Illinois with 12.8 million people and total debt per capita of $23,000 just behind Puerto Rico. Unlike Puerto Rico, however, residents of many cities (and counties) in Illinois have the added debt and pension burdens of their local governments to contend with, as well. In the case of the City of Chicago, this would add debt per resident of $23,000 to the Illinois state total, or a total debt per capita of $46,000, far greater than that of Puerto Rico.
