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.
- Public pensions being cut (Dallas being the most recent of an expanding history)
- Church plans moving to pay-as-you-go when assets run out
- Multiemployer (Union) Plan benefit cuts legalized
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.