After struggling to raise debt from third parties to repair crumbling infrastructure, the state of New Jersey has come up with a "clever" approach to fundraising that entails selling debt to their own insolvent pension funds...something we've dubbed the "Pension Ponzi Squared." Of course, because when everybody else shuns your debt for being too risky who better to sell it to than yourself?
With $3.4 billion in annual benefits payments versus only $1.9 billion in contributions, funds like the New Jersey Public Employees' Retirement System already qualified as a plain vanilla ponzi scheme. But, using what little pension assets they have left (38% net funded) to buy debt in the entity that ultimately backstops their liabilities is a whole new level of madness. As we recall, the mortgage CDO^2 didn't work out so well back in 2008.
As Bloomberg points out, this new "creative approach" to budget financing will require changes to a law that currently restricts NJ's pensions from buying more than 10% of a bond offering. Of course, we can't imagine why that limitation would have been implemented in the first place..."all" is almost always better than "some," right? Especially when you're buying the bonds of your own bankrupt parent.
New Jersey lawmakers are proposing a creative approach to raising money for needed work on Garden State roads: Sell bonds directly to its struggling pension funds.
A bipartisan bill backed by state Senate President Steve Sweeney would let the Transportation Trust Fund Authority sell securities directly to the retirement system, a step that would reduce the cost of issuing debt and provide a steady investment return. With respect to transportation debt, the bill proposes lifting regulations that block New Jersey’s pensions from buying no more than 10 percent of a bond offering.
"This would offer an investment strategy that is mutually beneficial for New Jersey’s underfunded pension system and the Transportation Trust Fund," said Sweeney in a statement.
Sweeney anticipates the transportation fund would pay up to five percent in interest annually, which would be a "reliable and positive return" for the pension system, which lost one percent on its overall investments last year, according to the release.
Meanwhile, this latest move comes after NJ Governor Chris Christie was forced to shut down road and rail projects over the summer when the state's Transportation Fund ran out of money. Ironically, S&P just downgraded NJ's debt last month because of the State's growing pension liabilities.
The Transportation Trust Fund Authority issued $2.8 billion of bonds in October, with 5 percent coupon securities due in 2031 priced to yield 3.02 percent. Governor Chris Christie temporarily shut down all road and rail projects this summer after the fund ran out of money.
S&P Global Ratings downgraded New Jersey’s debt one step to A-, the fourth-lowest investment grade, on Nov. 14 because of the government’s growing debt to the pension fund after years of failing to save enough each year. New Jersey’s $135.7 billion shortfall ranked it as the worst-funded pension system in the U.S. in 2015, according to data compiled by Bloomberg.
But, we've been told we have a tendency to be too cynical...this will all probably work out just fine.