Globalization Before Federalization for NJ Pensions

Former New Jersey state treasurer Andrew Sidamon-Eristoff has an opinion piece in njspotlight today that correctly diagnosed the seriousness of the crisis in the funding of public employee pension and health care benefits that New Jersey has neither the means nor the will to address.  Mr. Sidamon-Eristoff believes that the United States federal government which has the means (printing money) is where solutions lie:

A more limited, and perhaps more politically palatable, approach would be to provide a federal interest subsidy for pension-refinancing bonds. There is precedent. The federal Build America Bond program, part of the 2009 American Recovery and Reinvestment Act, subsidized 35 percent of the interest on state and local bonds issued for capital expenditures.

Once again, let’s use New Jersey as an example for how an interest subsidy might work. As of the end of fiscal 2015, New Jersey reported a total state net pension liability (roughly equivalent to the UAL) of $78.8 billion. This is a long-term obligation or debt like any other, with a cost of funds otherwise known as interest. Unlike a mortgage or business loan, however, there is no stated interest rate. Instead, it is imputed as a function of actuarial assumptions and calculations under government accounting rules. For the sake of clarity, let’s call it X percent.

Since New Jersey hasn’t contributed enough to its pension systems each year to amortize its net pension liability (the actuarially required contribution amount or ARC), and investment returns have not made up the shortfall, both the liability and the ARC keep spiraling upward. However, if the state used proceeds from bonds to make a full pension contribution, both the liability and the ARC would stabilize. Although the state would have to pay debt service on the pension bonds, it would come out ahead if the interest rate net of the federal subsidy is less than X percent. This could be assured by keying the interest subsidy to the pension system’s cost of funds. Moreover, the state would derive annual cash-flow savings if the pension bonds had a longer maturity than the pension system’s amortization period.

That’s not happening.

We are in a period of pension crisis on several fronts and the federal government has only gotten involved when current laws make isolationism inconvenient.

The federal government is stuck with the Pension Benefit Guaranty Corporation (PBGC) thanks to a 1974 law but since then the policy has been benign neglect. New Jersey pensioners stand a better chance of getting full benefits if they queue up now behind Zimbabwe at the World Bank rather than anticipating a federal bailout.


12 responses to this post.

  1. Posted by Anonymous on February 23, 2017 at 11:54 am

    No point in asking anyone anything on P&B, JB appears to be a sole source vendor for all we need to know?


  2. I wouldn’t want to bet on a glorious federal bailout, but i don’t think one can be ruled out. QE and ZIRP, for instance, are ‘federal’ policies that have propped up the asset values held by pension funds. Therefore, we’re already witnessing a de facto federal bailout.


  3. Posted by Eric on February 23, 2017 at 1:57 pm

    ZIRP and QE were directed to bail out the Wall Street banks. Washington DC and Wall Street are one in the same. They are Bruce Wayne and Batman,Clark Kent and Superman.
    Ben Bernanke’s helicopter only dropped money onto Wall Street, not onto the mere peasants on Main Street.
    The infusion of cash not only bailed out the crooked crony institutions on Wall Street, but also made their debt instruments appear more valuable on their balance sheets with interest rates held artificially low. This also punished the elderly savers and investors with worthless CD rates who are afraid of investing in equities.
    Dream on.


    • @Eric: OK, but I don’t see an argument against my proposition that ZIRP/QE are de facto fed bailouts of the mammoth public pension systems, done via Fed Reserve rather than Congress or Treasury. If you agree that unwinding QE/ZIRP would hurt the pension systems, then I think it follows that they are unusual forms of bailout.


  4. Posted by Eric on February 23, 2017 at 4:11 pm

    Yes. I agree with you, however, I believe it served as a mere unintended circumstance. The real focus was to bail out the Wall Street banks and AIG which owed Goldman too much money were it to go under as did Lehman Brothers.
    If you or I made bad investment decisions, we would lose money and possibly go bankrupt. This is not possible for Wall Street institutions.


  5. Posted by Anonymous on February 23, 2017 at 6:04 pm

    I do not believe that the state of NJ will default on its bonds. Knowing that pensions have been taking a higher priority, I expect NJ to bond the debt over 30 years to pay it.

    As a public employee on the verge of retiring, I can tell you that I will take out a mortgage and stick the bank if my pension is cut. Retirees need to look into discharging debts in the state in which they retire to protect themselves. In Florida, they can’t touch your home or your retirement accounts. Given the number of retirees that remain in NJ massive defaults on homes here would have a very negative impact on housing values too.

    Pay now, pay later, but it’ll be paid. Either directly, or indirectly.


    • Indeed anonymous……encouraging.massive defaults to bring down the home values for all New Jerseyians and sticking it to the banks so that you can get yours…sounds like the typical public sector mentality. Maybe the taxpayers should do the same thing and see what happens then. Ridiculous and laughable……


      • Posted by Anonymous on February 24, 2017 at 3:28 pm

        It happens all the time like during the Great Recession when homeowners (at least some) got mortgage forgiveness for the reduced value of their home.

        BTW, Florida, NJ, or wherever it won’t work like anon @2/23 6:04 described and here’s why. The only way you get home protection in FL is it has to be your domicile and I doubt you’d get any mortgage forgiveness on a NJ home that isn’t your primary residence.

        Maybe if you ‘cash out’ mortgage your NJ home and use the proceeds to buy a home in FL. But you can’t default on the NJ home until technically insolvent (ie when the pension check isn’t in the mail anymore). In the meantime you’ll be paying mortgage, taxes, insurance, etc. on the NJ home. I’m sure there’s a way to ‘beat the system’ by moving/hiding assets but you don’t need to wait for the pension to run dry – go for it!


    • Posted by George on February 25, 2017 at 12:18 pm

      ” I expect NJ to bond the debt over 30 years to pay it.’

      That means raising taxes to pay past pension obligations over 30 years, while paying current and future pension obligations, all the while paying to operate the state.

      What are the states current obligations? Like $200 billion of pension obligations with assets of $70 billion. They would need an extra $5 billion a year of taxes and spending cuts to cover $150 billion over 30 years.

      I also doubt the state could actually sell bonds for that much money.


      • Posted by Anonymous on February 25, 2017 at 3:34 pm

        $200B assumes future pension benefits continue to accrue and no health benefit changes. If the DBP remains the future accruals will be reduced and current health care coverage and premium share is out the window. Tuesday’s Budget Message will pave the way for significant changes going forward.


  6. Posted by Anonymous on February 23, 2017 at 7:28 pm

    I doubt the Trumputin Administration will save PBGC, they will need the money to support weekends at the southern Whitehouse and world travel of Trumputins sons to support and develop Trump Organization.


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