Pension Bank of NJ

Phil Murphy, the only declared 2017 Democratic candidate for governor of New Jersey, in 2005 chaired a task force that looked for solutions to the state’s, at the time, $12.1 billion pension problem.  It came up with a report urging less gaming of the system and these major fixes:

  • No More Pension Holidays— State and local government must meet their full obligation to make annual payments to the pension plans.
  • No More Actuarial and Valuation Gimmicks— State government must use consistent and generally accepted actuarial standards.
Outside of a few tweaks that might have upset some crossing guards nothing was done of any significance and the pension deficit increased fourfold officially and twenty-fold in real life. But, rather than revisit the recommendations of 2005 with some seriousness, Phil Murphy has taken on the New Jersey politician’s approach to problem solving in recent years:
Present an idea that sounds good to anyone who won’t think about it in any depth to people who are not going to think about it in any depth.

Former Wall Street executive turned 2017 Democratic candidate for governor Phil Murphy on Thursday unveiled a radical proposal for reviving New Jersey’s economy and saving its pension system millions in fees: A public bank, owned by taxpayers.

Daring New Jersey to “put our money where our mouth is” Murphy unveiled his idea for a “Bank of New Jersey” as the cornerstone of his economic platform during a speech at the New Jersey Institute of Technology.

……..

The idea is not new. The state of North Dakota chartered a state-owned bank in 1919, and began making federally-insured student loans in 1967. Murphy said that the average college graduate in New Jersey would save over $8,000 on their student loans.

Murphy said The Bank of North Dakota returned more than $130 million in returns on its investments to taxpayers.

Murphy said he believes a New Jersey public bank would be even more successful, creating a new revenue to pay down the state’s debt while simultaneously spurring small business investment with more favorable lending terms, offering affordable borrowing to college students, and curbing Wall Street influence on politics.

The benefits would accrue to students, who would benefit from low interest rates for college tuition, for small businesses that would gain greater access to capital, and to municipalities that would no longer need to rely on Wall Street bond houses taking a cut.

Low-interest rates to spur the economy and help with student loans is an easy sell but where will the money come from? He continues:

The Democratic candidate also said such a proposal would also offer substantial savings to New Jersey’s state worker pension funds.

“I’d love to sit down and pitch the pension plans, and say, ‘This is an investment you should consider,'” Murphy said. “We’re paying, still, huge fees (to Wall Street hedge funds) and not getting much in return. It got me thinking, why not pitch this as a compelling investment to the pension plans. It’s something we haven’t done yet, but it’s a potential area of equity funding.”

So the New Jersey pension trust, whatever is left of it, is going to get that 7.9% assumed investment return they are predicting by backstopping a bank that makes loans at 2% interest to students and start-up businesses.

Even Christie wouldn’t have the nerve to recommend something this blatantly absurd (unless there was a way for enough of his campaign donors to get a cut).

8 responses to this post.

  1. Posted by dentss dunnigan on September 8, 2016 at 7:12 pm

    I looked into the Bank of North Dakota in 2008 after the melt down of banks .It’s actually a great idea if done right except for one thing ….it’s not FDIC insured .Who in his right mind would let New Jersey have access to his/her money and on top of that not being insured .When you put money into a bank your giving the money to the bank to do with it as it states in their charter ..loans ,housing and municipal projects (ND is a right to work state so projects cost a lot less )..if the bank isn’t getting paid back”your” money your out of luck . This state has a horrible track record imagine owning a piece of Revel casino getting back pennies on the dollar …nope .

    Reply

    • Posted by now retired Pat on September 8, 2016 at 7:35 pm

      As for student Loans, I have often chaffed at the idea of a “guaranteed” student loan that has a 7+% interest rate! If the Federal government “guarantees” the loan (and the student can not include this loan in any bankruptcy, ever…then why on earth would the rate be greater than 2%?? Even at 2% in today’s economy would be a GREAT return!

      The system is broken and the rich get richer at the expense of the poorer. “Family banks” are a GREAT strategy, if you can trust everyone in the family. (the family members all deposit $$$ into a central account and loan family members $$ with a relatively small (but still profitable) interest rate of maybe 3%. Everyone wins! This topic should be looked into/discussed in greater detail. It may have legs..

      Reply

  2. Phil Murphy also proposed back in 2005 that the state sell off some major asset for $8.6 billion.

    The report didn’t suggest what asset it would be, but it would have to be a highway. Jon Corzine, Ray Lesniak, and others supported this a few years later when they tried to monetize the Turnpike.

    The Commission also used a lower number for NJ’s unfunded liability. It said it should be considered $12 bil instead of $25 billion.

    “Immediately reduce the Defined Benefits Plans’ $12.1 Billion deficiency.
    We estimate that $12.1 billion is required to eliminate the current fund deficiency across all systems, including $8.6 billion for the State, and $3.5 billion for local government employers. The $12.1 billion is an estimate upon which actuaries rely to ensure full funding in future years. It contrasts with the widely-reported $25 billion deficiency, which is based solely on current market values. It is expected that the difference between the two numbers will be made up over time by the market, sound finances and full contributions. Accordingly, resolving the $12.1 billion deficiency is the priority.”

    http://www.state.nj.us/benefitsreview/final_report.pdf

    Reply

  3. Posted by boscoe on September 9, 2016 at 1:01 am

    I’m not sure what problem this proposal is supposed to address. Unlike North Dakota in 1919, there is no shortage of commercial credit mechanisms available today in New Jersey. If offering low-cost student loans is determined to be a worthwhile public policy endeavor, then subsidize such a program with public (taxpayer) dollars and forget about a profit motive. Public pension funds have a fiduciary duty to their own investors; namely, their members and the government. There is no provision for a charitable set-aside. And it is difficult to see any scenario where a pension fund could attain a defensible rate of return on a low-cost lending proposition like this.

    In 2011, the Federal Reserve Bank of Boston conducted a study of North Dakota’s State Bank at a time when Massachusetts was considering such a vehicle. The conclusion was that it would require a very large capitalization and that it had little relevancy to a modern state economy, particularly in the Northeast. See their conclusions starting on page 19 of the report.
    https://www.bostonfed.org/publications/new-england-public-policy-center-research-report/2011/the-bank-of-north-dakota-a-model-for-massachusetts-and-other-states.aspx

    Reply

  4. Posted by George on September 9, 2016 at 12:54 pm

    “where will the money come from? ”

    Where is the Global war on terror money or the F-35 money coming from?

    Accoding to Alvin Rabushka during the colonial period the State of New Jersey operated a mortgage bank that was so successful the State stopped collecting taxes. Search on Alvin Rabushka for his scholarship.

    One reason for the revolutionary war in NJ wasn’t just the new taxes, it was that NJ had 0 taxes before the crown imposed them.

    New York taxpayers were not amused. Customs rates were imposed on a three-year basis. When the customs law of 1677 was not renewed in 1680, several colonists seized the collector of customs as he tried to enforce the expired law. They tried him in local courts, convicted him, and returned him to England as a prisoner (where he was subsequently exonerated). The Duke of York, to whom the English king had given New York in 1664, thereafter paid greater heed to the complaints of his subjects. Colonial governments in Maryland and South Carolina imposed few import or export duties, and there is no record of customs duties in New Jersey before 1702.

    http://www.hoover.org/research/colonial-roots-american-taxation-1607-1700

    Reply

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