In our "ARC and the Covenants" series, we look at the total indebtedness of US cities and counties, including general obligation debt and underfunded pension and retiree healthcare plans. While most U.S. cities and counties have some time to undertake remediation measures to address underfunded plans, difficult choices will be required by some municipalities to meet all future obligations. Legal precedents from recent bankruptcies suggest that bondholders need to understand the totality of credit risks they face. While exemption from state and local taxation has value, investors must also weigh the benefits of portfolio diversification and the risks of concentration.

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