Posted by on March 17, 2017 9:10 pm
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Categories: ADC American people of German descent Annuity Fund Bond Business CDO Chris Christie Credit Rating Agencies Economy Finance Financial services Labor money Ontario Teachers' Pension Plan Pension Rating Agencies Social Issues state chip state senate Teachers' Pension and Annuity Fund

Standard and Poor’s credit rating analysts for the state of New Jersey, David Hitchcock and John Sugden, apparently think that funding only half of your state’s annual actuarially determined contributions is a bad thing…who knew?  So, just to make sure we achieve crystal clarity here, S&P believes that adding to NJ’s $66 billion pension underfunded liability, which would be much higher but for a ridiculous assumption the state makes in setting its return on assets at an artificially high rate of 7.65%, each and every year by contributing less to the fund than what is paid out in benefits, is a bad thing?

Of course, as S&P notes, NJ’s pension problems won’t bankrupt the state until sometime “down the road” so an “A-” rating is still reasonable for now.

Short term, the proposed budget leaves the state in similar financial condition to where it started 2017, with slim, but adequate reserves, and some vulnerability to potential revenue shortfalls. However, down the road, because New Jersey plans to only partially fund its actuarially determined contributions (ADC), the picture looks much worse, as reflected in our current ‘A-‘ general obligation rating and a negative outlook on the state.

The governor’s budget proposal follows his multi-year plan to gradually ramp up to full funding of the state pension ADC over 10 years. New Jersey would fund only 50% of the ADC in fiscal 2018, after funding 40% in fiscal 2017. Underfunding in any year ratchets up future state liabilities, in effect pushing back the tide, as New Jersey comes closer to the day when it will be left with no choice but to confront its very significant retirement obligations. The term-limited governor’s successor will face tough funding decisions as early as fiscal 2019. The planned 50% ADC contribution in fiscal 2018 in itself represents a record payment of $2.5 billion, boosted in part by the state’s decision to lower the assumed rate of return to a somewhat less aggressive 7.65% from 7.90%. We calculate the budget proposal, if enacted, would leave New Jersey with a sizable structural budget gap of about 9% of proposed 2018 appropriations–2% attributable to various one-time budget items in fiscal 2018, and 7% representing pension funding below ADC–a similar structural budget gap to last year, despite the increased pension contribution in 2018.

That said, we’re happy to note that S&P was encouraged by Chris Christie’s recommendation, even though it wasn’t a part of his official budget and would likely face stiff opposition, to set aside revenues from his state’s lottery enterprise system to fund New Jersey’s pension ponzi for a period of 30 years. Per

Christie’s biggest surprise was his plan to use proceeds from state lottery ticket sales to pay for public worker pensions’ ever-increasing tab.

The lottery, which is expected to bring in $965 million this year, helps fund education programs, psychiatric hospitals, centers for people with developmental disabilities and homes for disabled soldiers.

Under the state Constitution, lottery proceeds must be spent on state institutions and state aid for education. The state pays a number of costs on behalf of local school districts that can be categorized as aid, including the employer share of the Teachers’ Pension and Annuity Fund.

The governor estimated this quick injection of cash would reduce the pension fund’s unfunded liability — $66.2 billion — immediately by $13 billion and each year reduce the amount actuaries recommend the state chip in.

“If implemented correctly this action would increase the value and stability of our pension funds immediately and would please bond investors and credit rating agencies, also giving greater confidence to New Jersey’s public employees,” he said.

State Senate President Stephen Sweeney (D-Gloucester) said if Christie’s lottery plan “makes sense” to help fix the pension system, state lawmakers “will be happy to do it.”

Of course, as we pointed out previously, Christie’s plan to send lottery dollars to his own pension just might have something to do with his state’s latest ponzi that envisions issuing debt, intended to cover state budget deficits, to it’s own insolvent pension fund.

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.

NJ Pension

For those who haven’t followed the pension debacle in NJ, here is a decent recap of how decades of bad leadership in the governor’s office created the mess that will inevitably bankrupt the state.

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