Who Fitch Really Downgraded – Again*

New Jersey’s bond rating have been downgraded seven times during the Christie administration with ratings agencies citing retirement benefit costs each time:

2/9/11 S&P Downgrade: AA- from AA

4/27/11 Moody’s Downgrade: AA3 from AA2

8/18/11 Fitch Downgrade: AA- from AA

4/9/14 S&P Downgrade: A+ from AA-

5/1/14 Fitch Downgrade: A+ from AA-

5/14/14 Moodys Downgrade: A1 from AA3

9/5/14 Fitch Downgrade: A from A+

The explanation of New Jersey’s most recent bond rating downgrade includes:

Above-average state debt obligations are compounded by significant and growing funding needs for the state’s unfunded retirement liabilities. Continued pension funded ratio deterioration is projected through the medium term and full actuarial funding of the required contributions is several years off.

It was the employee benefit liabilities yet only three years  ago the State Senate president assured us:

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that the recent reform ‘clearly fixes the problem.”

Why didn’t Fitch believe him?

Because Stephen Sweeney was lying, not intentionally, but because he is unqualified to discern the truth.

Unfortunately at most levels of government in New Jersey you get elected by getting the most people to give you the most money to put up the most signs to lure the most voters.  To get that money you must be willing to repay your donors and you will only get that money if your donors feel they are assured of a return on their investment (i.e. the candidate they back has to do what they tell him).

And keep in mind Senate president Sweeney is near the top of government.  Consider those hundreds of decision-makers on Councils and Authority Boards who have little more qualification for their position than obeisance to their political patrons.  I could cite several examples from Solar Panels to debt restructurings where vested interests looking to make a killing gulled hapless politicians into rubber stamping their schemes but here is a fairly recent instance:

The RVSA board decided to add on to an incinerator in Union County on the advice of a handful of ‘professionals’, all of whom made out handsomely.  They spent $36 million and it turns out that running the addition cost more money than it would save so it sits idle.  However, not idle are the connected lawyers who are now suing everyone involved (except the politicians).  More debt for nothing and the only response is (and will be) to blame the advisers whether they be the engineers, architects, or actuaries when the finger should be pointed at the people’s representatives unqualified for their real jobs.

Fitch sees it and they properly disregard Sweeney’s ravings.  It was not really the level of debt that Fitch was downgrading but rather the clueless Sweeneys in this state who are  responsible for the creation of that debt with no legitimate plan to pay it off.

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* Re-presentation with scant few changes from a blog put up on August 17, 2011.

10 responses to this post.

  1. Posted by Tough Love on September 7, 2014 at 11:52 pm

    John,

    This blog post seems to be agreeing with my contention that as far as Public Sector pensions & benefits are concerned, the grossly excessive levels in place today (when compared to Private Sector pensions/benefits and the near equal “cash pay” in the Public/Private Sectors) were obtained by their Unions’ BUYING our elected officials’ favorable votes with campaign contributions.

    If so, it’s seems an easy conceptual, (if not easy legal) step to argue that INSTEAD of trying to fully fund these excessive promises (so underhandedly obtained), we should try our darnedest to REDUCE these promises (at least for the future service of all CURRENT workers) to the level that likely would have been granted in the absence of this Union/Politician collusion…….. yet I can’t say that I’ve ever heard you forcefully come out in support of such reductions.

    Why not ?

    Reply

    • Posted by Anonymous on September 8, 2014 at 12:49 am

      Even when John tells you why, you will be blind and deaf to it. End of conversation.

      Reply

    • Primarily because I haven’t considered it. I try to go over stuff here that I’m expert on and nobody else is saying. That happens to be the duplicity in actuarial numbers for public pension funding and there has been plenty of material with nuances for that.

      As for the benefits themselves they’re subjective as to what different public services are worth. For some I could mention getting a pension of $l dollar a year is excessive for the damage they do in their day jobs. However the mis-calculation of pension and OPEB values means that the receivers think they are getting more than they actually are since they’re looking at the benefits while the givers are looking at the costs which are a lot less than they should be paying so they see a relative bargain.

      Then there’s what the retirees will actually get. However many games get played it comes down to being able to pay out only what is put in. For current retirees that might end up as 80% of what they were promised. For new-hires that’s going to be about 20% eventually. It’s hard to criticize the benefits package for a 25-year-old cop working the streets of Newark putting in 10% of their salary for a pension that will be substantially defaulted on. I see my role as waking up that cop (and everyone else) to that inevitable reality and then maybe we can move on to discussions of equity.

      Reply

      • Posted by Tough Love on September 8, 2014 at 11:15 am

        John, Interesting reply … a few thoughts:

        (1) Where you says ……”However the mis-calculation of pension and OPEB values means that the receivers think they are getting more than they actually are since they’re looking at the benefits while the givers are looking at the costs which are a lot less than they should be paying so they see a relative bargain. ”

        That’s very true if the currently promised benefit levels do not EVER get paid out. and with the cost to taxpayers (to fund a lower level of actually paid out benefits) higher than they are today, but far lower than what they would need to be if full promised benefits were indeed paid out.

        The problem …. from the viewpoint of the taxpayers (e.g.,…. me) is that might we be forced in some way to fund the enormously high cost of the actual (grossly excessive) promises ….. with being forced to do so CERTAINLY being the goal of the Public Sector Unions/workers ? Safety from that possibility is to formally get these “promises” reduced ….. and certainly for FUTURE Service accruals. This is what I advocate for.

        Of course the workers’ viewpoint differs ….. essentially, we (the workers) were promised a specific pension/benefit package and we demand that that promise be kept regardless of the cost to taxpayers. While I understand that perspective, it ignores the excessive LEVEL of (and hence COST of) their promised pensions, as well as the underhanded way those promises were obtained…… and that those who they want to pay for THEIR pension & benefits (the Taxpayers) have seen their own generally much smaller (FUTURE Service) pensions materially reduced and feel…. why are they entitled to a better deal and stronger protection from reduction than I, and on my dime?

        (2) where you said … “For new-hires that’s going to be about 20% eventually. It’s hard to criticize the benefits package for a 25-year-old cop working the streets of Newark putting in 10% of their salary for a pension that will be substantially defaulted on. I see my role as waking up that cop (and everyone else) to that inevitable reality and then maybe we can move on to discussions of equity.”

        I agree completely …. and getting the younger shorter-service workers (not just police) to UNDERSTAND that:

        (a) there is simply no way that THEY will actually receive the grossly excessive promises in place today, and
        (b) that THEIR OWN contributions are simply being DIVERTED to fund an unsustainable Ponzi scheme for current retirees and soon-to-retire older long-service actives

        makes no sense and is NOT in their own best interests.

        Reply

  2. Posted by Eric on September 8, 2014 at 12:04 am

    I feel sorry for Sweeney. He barely made it out of high school and does not even have a college degree. He is in “way over his head” and should not be blamed. He has been lied to and meant well in his proposed pension fix years ago which Corzine never wanted to touch. Perhaps if Sweeney’s original plan had been implemented, there would have been a more favorable outcome today.
    It seems fashionable to “pick on” the defenseless which is morally wrong.
    Eric

    Reply

  3. Posted by Anonymous on September 8, 2014 at 1:17 am

  4. Posted by George on September 9, 2014 at 4:28 pm

    Municipal bonds are no longer considered High Quality Liquite Assets for a bank’s Liquidity Coverage Ratio.

    HQLA And Munis — The New Rules And Regulations
    http://www.investing.com/analysis/hqla-and-munis—-the-new-rules-and-regulations-225114

    Reply

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