Favorable Conditions for New Jersey?

According to Bloomberg the “New Jersey’s Economic Development Authority is selling $525 million of bonds this week for school construction in the state’s poorest communities, the largest such sale since Governor Chris Christie took office in 2010.”

But why bond so much now after eight consecutive downgrades of New Jersey’s credit rating?

Chris Santarelli, a spokesman for Treasurer Andrew Sidamon-Eristoff, said the program needs money and that the market conditions “seem favorable” for the state.

“We are aware the market watches New Jersey very carefully,’” he said. “Our concern is to ensure that our financing team provides as perfect market execution as possible. We expect a positive outcome for this pricing.”

Back on September 5 Fitch downgraded New Jersey’s overall bond rating from A+ to A but for this issue they went even lower to A- with the outlook still negative on September 24 and it is hard to find anything favorable in their press release (excerpted below with emphasis added):

KEY RATING DRIVERS

APPROPRIATION OBLIGATION OF THE STATE: State contract payments provide for debt service on NJEDA obligations; payments must be appropriated annually by the state legislature, resulting in a rating one notch below the state’s ‘A’ general obligation (GO) bond rating.

NEGATIVE OUTLOOK: The Negative Rating Outlook incorporates Fitch’s concern that there is considerable risk that state actions to address near-term budgetary and pension challenges may leave unaddressed the state’s longer-term structural and liability challenges, particularly given the state’s lagging economic and revenue performance and narrow liquidity.

LONG-TERM LIABILITIES CONSIDERABLE: 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.

WEALTHY ECONOMY AND LAGGING RECOVERY: New Jersey benefits from a wealthy populace and a broad and diverse economy. However, the state’s economic performance has lagged the nation in recovery from the recent recession, with improvement in 2013 trailing off at the close of the year, and very slow year-over-year (yoy) employment growth continuing through 2014.

MINIMAL CASH BALANCES RESULT IN LIMITED OPERATING FLEXIBILITY: Minimal cash balances have been maintained in recent years, providing limited flexibility to absorb unforeseen needs or revenue under-performance.

BROAD EXPENDITURE REDUCTION AUTHORITY: The governor has strong executive powers to implement any necessary expenditure reductions to balance the budget and the state has a consistent history of doing so; however, options have become more limited as the state’s fixed cost burden grows.

RATING SENSITIVITIES

The rating is sensitive to shifts in the state’s ‘A’ GO credit rating to which this credit is linked. The GO rating is sensitive to the state’s management of its budget challenges. Continued deterioration in the state’s budgetary flexibility or reserves or a failure to adequately provide for its liabilities, could lead to a downgrade.

COMPARATIVELY HIGH LONG-TERM LIABILITIES

New Jersey’s debt levels are high for a U.S. state, and ongoing capital demands for school construction, environmental protection and transportation remain large. Net tax-supported debt as of June 30, 2014 equaled 7.4% of 2013 personal income as compared to a median of 2.6% for the states.

Unfunded pension liabilities attributable to the state are also well above average. These liabilities are expected to increase over the next several years absent additional reform measures and materially higher contributions than currently expected. Fitch expects the pension contribution increases, combined with expected annual increases in OPEB funding demands, to further strain the state’s operating budget.

For the public employees’ retirement system (PERS) and the teachers’ pension and annuity fund (TPAF), as of July 1, 2013, systemwide reported funded ratios were 62.1% and 57.1%, respectively. Using Fitch’s more conservative 7% discount rate assumption, the plans were 56.5% and 51.9% funded, respectively. As of July 1, 2013, the state portion of pension liabilities for PERS was 46% funded on a reported basis, or 41.8% using Fitch’s more conservative 7% discount rate. On a combined basis, as of July 1, 2013, New Jersey’s net tax-supported debt and adjusted, unfunded pension obligations attributable to the state, as adjusted for a 7% return, totaled 16.5% of 2013 personal income, well above the 6.1% median for all U.S. states.

The governor has recently convened a special pension taskforce to propose options for additional pension reform. The governor has acknowledged the sizable and increasing burden of pension contributions and expects to recommend that additional, as yet unspecified, reform measures be considered in the next legislative session.

About the only thing these market conditions are favorable for is impeachment.

7 responses to this post.

  1. Posted by Hoboken_Guy on October 6, 2014 at 4:39 pm

    Sadly I think they mean the bonding conditions are more favorable now than they will be in a few months…. when Jersey is down graded again. Plus as the Fed ends QE rates will continue to creep up.

    Reply

  2. Posted by Tough Love on October 6, 2014 at 6:03 pm

    Quoting …..”About the only thing these market conditions are favorable for is impeachment.”

    and ………. a WELL deserved and VERY needed HARD freeze (ZERO future growth) of the current grossly excessive Public Sector pensions granted ALL of NJ’s (State and Local) employees.

    and …. a very short duration (no more than 3-5 year) grade-down to ZERO for retiree healthcare subsidies.

    Reply

  3. Posted by Eric on October 6, 2014 at 9:35 pm

    Hoboken-Guy:
    There is no way that the Fed can ever stop QE. It will continue to “prop up” the stock market so long as the Fed exists. The stimulus will become more massive over time.
    Eric

    Reply

  4. Posted by truthnolie on October 7, 2014 at 5:28 pm

    “Changing N.J. pension system to 401k would cost $42 billion, liberal think tanks say”

    http://www.nj.com/politics/index.ssf/2014/10/liberal_think_tanks_changing_njs_pension_system_to_401k_would_cost_42_billion.html

    Back to the drawing board, those who think they know it all.

    Reply

    • Posted by Tough Love on October 7, 2014 at 10:36 pm

      Truthnolie, Anyone who truly understands pension design and funding knows that your statement quoted above is patently false when the word “cost” is properly defined. The following explanation is not really meant for YOU, because (whether you truly understand it or not, clearly you comment only to support the grossly excessive, unnecessary, and unjust pensions granted Public Sector workers, and based on your many previous comments, you have no problem omitting pertinent facts, distorting the truth, and outright lying). I offer it for readers who prefer transparency, honesty, and the truth.

      The FACTS …………

      The annual “cost” of pension accruals associated with a given year of employment are based on the richness of the Plan formula and Plan provisions, regardless of whether the Plan is a Defined Benefit (DB) Plan or a Defined Contribution Plan (DC). Either can be DESIGNED to be MORE or LESS costly.

      DC Plans, which are the most common Plan offered Private Sector workers (under IRS Code section 401K) typically include employer contributions of from 3%-5% of pay. In the Private Sector, those 401k employer contributions plus Social Security (for which the employer contributes 6.2% of pay on the employee’s behalf) typically encompasses the Private Sector worker’s entire retirement package. Note that as a level % of pay that total is just about 10% of pay for the Private Sector worker. And THAT 10% is indeed the correct measure of the annual “COST” of this retirement package.

      Now let’s compare that to what PUBLIC Sector workers typically get …… and in doing so we should keep in mind that most NJ workers (except police … I believe) do indeed participate in SS, costing their NJ employers (meaning Taxpayers) that same 6.2% of pay.

      NJ’s PUBLIC Sector workers are promised DB (not DC Plans) and due to the richness of Plan “formulas” and the generosity of Plan “provisions” (such as VERY young full-unreduced retirement ages, and up until recently suspended, COLA increases … which look like they will be reinstated under Court challenge) are MUCH MUCH more costly (always multiples more costly) than the cost of DC Plans granted Private Sector workers.

      While the “Cost” of a Private Sector DC 401K Plan is not subject to debate … it’s simply the % of pay contribution in the year (and, as stated above, is typically 3-5% of pay annually)….. the annual “COST” of a DB plan CANNOT be definitely determined until all Plan participants have died. That’s because DB pensions don’t promise CONTRIBUTIONS, but BENEFITS (paid annually as a life annuity in retirement) and the actual “COST” of such promises is dependent on FUTURE investment earnings rate and FUTURE participant mortality rates. As such, actuaries annually ESTIMATE the annual cost of benefit accrued in that one year, called the “normal cost”. Since ACTUAL developing investment and mortality will never exactly equal prior year ESTIMATES, the actuaries “normal cost” figures will always be high or low and if low, the shortfall (resulting in unfunded liabilities) is made up with annual contributions IN ADDITION TO the “normal cost”. Those additional contributions, together with the “normal cost” equal the annual ARC.

      But it gets more complicated ……..

      The actuaries calculate the normal cost and ARC annually, but NJ (and many other gov’ts) contribute much less that the ARC amount specified by the Plan actuary. So, not only do funding shortfalls arise from investment and mortality experience different than that assumed by the actuary, but from Plan contributions less than the ARC specified by the Plan actuary. As an example, due to budget constraints, NJ created a schedule to linearly grade into paying the full ARC over a 7 year period. These less-than-full ARC contributions will cumulatively INCREASE NJ Plan underfunding by about $15 Billion over the 7 year grade-in period.

      Sorry, I digressed a bit above ……

      While as I stated earlier, the ultimate “cost” of a DB pension (expressed as a level annual % of pay) CANNOT be known until all participants die, it IS estimated annually in a self-correcting process that would (under ideal circumstances) lead to (an “expected”) fully-funded pension upon each employee’s retirement.

      Huge amounts of prior experience and detailed knowledge of the actual Plan participant population enables accurate “COST” estimate RANGES, again expressed as a level % of pay. These reasonable ranges come about because the (investment, mortality, and other) assumptions that go into DB contribution calculations themselves have reasonable ranges. As one example, a Plan will ultimately “COST” less if on-average Plan assets earn 10% annually than if Plan assets earn 5% annually.

      Now the nitty gritty ……..

      The reasonable annual “TOTAL COST” range (as a level % of pay) just for the “normal cost” alone (EXCLUDING incremental amounts necessary to amortize existing Plan asset shortfalls) is 20%-35% of pay for non-safety workers (incl teachers) and 40%-50% of pay for safety workers. Yes, these high annual %-of-pay contribution ranges are indeed necessary to fully fund a Public Sector worker’s pension OVER THEIR WORKING CAREER (as it should be, and NOT passing the costs on to FUTURE generations).

      Now lets compare to our Private Sector worker (in the earlier paragraphs above). Non-safety Public Sector workers generally DO participate in SS so the 3%-5% of pay 401K employer DC Plan contribution is directly comparable (apples-to-apples) with the 20%-35% of pay TOTAL COST of their DB pensions LESS the typical 5% contribution they THEY directly make. Bottom line for non-safety workers ….. the Taxpayer is “responsible for” Public Sector Plan contributions somewhere between 15% and 30% of pay annually vs the 3%-5% that they typically get from their employers …… over 5 times MORE than what THEY get.

      For safety workers (who, per my understanding do not participate in SS), the roughly 10% of pay Private Sector employer contribution (401K + SS) is directly comparable to the Taxpayer contribution of 40-50% of pay, less the typical safety worker contribution of about 10%. Bottom line for safety workers ….. the Taxpayer is “responsible for” Public Sector Plan contributions somewhere between 30% and 40% of pay annually vs the 10% that they typically get…….. 3 to 4 times MORE than what THEY get.

      Unless you’re quite short in “grey matter”, it indeed seems inconceivable that a switch of Public Sector workers from their VERY generous DB to DC Plans (of equal generosity to those typically granted Private Sector workers) could cost MORE …. because it does not. And it is unlikely Public Sector workers could convince elected officials to grant DC Plans with more than VERY modestly higher “CONTRIBUTION” percentages (than those typically granted Private Sector workers) because the unfairness would be too obvious (unlike the myriad of ways the VERY high costs of DB Plan can be “hidden”). ANY reasonable DC Plan for future service years will ALWAYS “COST” far far less than currently promised Public Sector DB Plans.

      Now, here’s how biased, uninformed, or outright charlatan writers come about saying that a conversion from DB to DC Plans would “COST” more ……….

      (1) Since the current DB Plan would be frozen, they point to the end-of and need-for future-year active employee contributions to sustain the DB Plan. That is patently absurd because under current NJ practices TOTAL Plan contributions for any one employee are far less than the best-estimate cost of THAT employee’s annual pension accrual alone, certainly leaving NOTHING available to be diverted to pay for those currently retired or soon to retire, In fact, the assumption that such continued employEE are needed is the epitome of a PONZI scheme.

      (2) Some argue that in rundown mode, Plan assets must be invested much more conservatively, and sometime argue that GASB accounting rules require faster amortization of existing Plan shortfalls. First, that latter is simply false, as there is no such GASB requirement. And, for MANY years there is VERY little need to change investment allocations.

      (3) and the most egregious …. the added “COST” that such writers point to comes from NOT comparing the true (actually known) DC Plan COST to the true “best estimate” DB Plan cost (from the ranges I noted above), but by comparing the DC Plan COST to what NJ is ACTUALLY CONTRIBUTING (as a % of pay) today. Indeed NJ is actually contributing very little as a % of pay, but what NJ now ACTUALLY CONTRIBUTING is by no means the “COST” of annual pension accruals. And that huge annual shortage (with interest) between the TRUE COST and what we are actually contributing is growing exponentially.
      ————————————————————————

      So that the readers don’t walk away thinking that all I’ve done (beyond dis-proving the the quoted statement that a switch to DC plans would “COST” more) is to support the Public Sector workers’ contention that the taxpayers have consistently underfunded their promised pensions, there is MORE to the story.

      Public Sector Unions/workers like to blame our financial predicament on UNDERFUNDING these promised pensions. But what they will NEVER discuss is that the “normal cost” and associated “FUNDING” is directly proportional to the generosity of the promised pensions. E.g., if you make the promise twice as big, the required funding is twice as great. So ONLY looking at whether taxpayers have “funded” appropriately per Plan promises, completely ignores the VERY important issue of whether the funding requirements are so high BECAUSE the promised generosity is too great.

      I strongly contend that it is. In fact, it is specifically BECAUSE these Plans are so “GENEROUS” that the level annual % of pay contribution requirement are roughly 5 times (see above) greater than what Private Sector employers are willing to contribute to THEIR employee’s retirement Plans (see above discussion).

      Under ANY reasonable analysis, Public Sector pensions are always AT LEAST 2x greater in value at retirement than those of comparable Private Sector workers retiring at the SAME age with the SAME years of Service and the SAME pay, MOST OFTEN 3X-4X greater, and for safety workers USUALLY 4X-6X greater.

      THAT, grossly excessive pension “GENEROSITY” is the ROOT CAUSE of the problem …. and funding FOLLOWS from generosity.

      Reply

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