Tag Archives: Garden State

Strong words from the SEC on Public Sector Pensions

As state and local governments begin to pull back the curtain on the true value of their pension liabilities with the implementation of GASB 68, Daniel Gallagher, Commissioner of the SEC issued an important statement last week, noting in plain terms that how governments measure their liabilities would have serious repercussions in the private sector. Here’s part of the remarks worth considering:

 …for years, state and local governments have used lax governmental accounting standards to hide the yawning chasm in their balance sheets…

The riskiness of a pension obligation depends on state law.[32]  If pension obligations have the same preference as general obligation debt, then the municipality’s own municipal bond yield (generally around 5%) would be the proper discount rate.[33]  Or, if as we’ve seen from Detroit, pensions will be saved before all else, then we should use a default-free measure to discount the liability:  specifically, the Treasury zero-coupon yield curve.[34]  This would result in a discount rate in the low 3% range.

Obviously, the higher the discount rate, the lower the present value of the liability.  The difference between a discount rate in the range of seven percent and one in the range of three percent is in large part responsible for the hidden $3 trillion in unfunded liabilities that are currently going unreported.

This lack of transparency can amount to a fraud on municipal bond investors, and it does a disservice to state and local government workers and retirees by saving elected officials from making the hard choices either to fully fund the pension promises that were made to public employees,[35] or not to make the promises in the first place.

In the private sector, the SEC would quickly bring fraud charges against any corporate issuer and its officers for playing such numbers games.  And, we would also pursue and punish the so-called fiduciaries who recklessly seek yield to meet unrealistic accounting assumptions.  We should not treat municipalities any differently.”

GASB 68 asks that sponsors use a high- yield, tax exempt 20-year municipal GO bond only on the unfunded portion of the liability. This will reveal bigger funding gaps in public sector pension plans. But it does not reveal the full value of the liability since it allows sponsors to continue using the higher discount rates on the funded portion of the liability.

 In addition to using the new GASB standards, Commissioner Gallagher advises that governments should also disclose their pension liabilities on a risk-free basis. This would have the effect of showing the value of these promises on a ‘guaranteed-to-be-paid’ basis. Commissioner Gallagher’s suggestions are extremely sensible and a call to basic transparency in public sector liability reporting.

Ignoring the value of pension benefits is not going to make them cheaper to fund, and the longer a state waits to accurately measure the liabilities and payments, the worse it gets. Just ask New Jersey –  which is struggling to balance its budget and meet a fraction of a fraction of the required annual pension contribution to its state pension system. The situation is so dire that it could trigger yet another downgrade for the Garden State.


Credit Warnings, Debt Financing and Dipping into Cash Reserves

As 2013 comes to an end recent news brings attention to the structural budgetary problems and worsening fiscal picture facing several governments: New Jersey, New York City, Puerto Rico and Maryland.

First there was a warning from Moody’s for the Garden State. On Monday New Jersey’s credit outlook was changed to negative. The ratings agency cited rising public employee benefit costs and insufficient revenues. New Jersey is alongside Illinois for the state with the shortest time horizon until the system is Pay-As-You-Go. On a risk-free basis the gap between pension assets and liabilities is roughly $171 billion according to State Budget Solutions, leaving the system only 33 percent funded. This year the New Jersey contributed $1.7 billion to the system. But previous analysis suggests New Jersey will need to pay out $10 billion annually in a few years representing one-third of the current budget.

New Jersey isn’t alone. The biggest structural threat to government budgets is the unrecognized risk in employee pension plans and the purely unfunded status of health care benefits. Mayor Michael Bloomberg, in his final speech as New York City’s Mayor, pointed to the “labor-electoral complex” which prevents employee benefit reform as the single greatest threat to the city’s financial health. In 12 years the cost of employee benefits has increased 500 percent from $1.5 billion to $8.2 billion. Those costs are certain to grow presenting the next generation with a massive debt that will siphon money away from city services.

Public employee pensions and debt are also crippling Puerto Rico which has dipped into cash reserves to repay a $400 million short-term loan. The Wall Street Journal reports that the government planned to sell bonds, but retreated since the island’s bond values have, “plunged in value,” due to investor fears over economic malaise and the territory’s existing large debt load which stands at $87 billion, or $23,000 per resident.

This should serve as a warning to other states that continue to finance budget growth with debt while understating employee benefit costs. Maryland’s Spending Affordability Committee is recommending a 4 percent budget increase and a hike in the state’s debt limit from $75 million to 1.16 billion in 2014. Early estimates by the legislative fiscal office anticipate structural deficits of $300 million over the next two years – a situation that has plagued Maryland for well over a decade. The fiscal office has advised against increased debt, noting that over the last five years, GO bonds have been, “used as a source of replacement funding for transfers of cash” from dedicated funds projects such as the Chesapeake Bay Restoration Fund.


What New Jersey Pays for its Police

This Sunday’s Star Ledger ran cover story on salaries for New Jersey’s police force. The median salary for a police officer in the Garden State is about $90,000. The Ledger also compiled a database for police salaries by municipality. Their analysis reveals that three out of every 10 officers makes over six figures and that the largest salaries are generally paid to officers in towns with the least crime.

Keep in mind these are strictly salary figures and exclude pensions, health benefits, overtime pay and other perqs. As an example, the average salary for an officer in Camden is $79,656, which ranks number one in violent crime. Bay Head Borough in Ocean County ranks 450 in violent crime and the average salary for a police officer is $100,309.

Some officers argue these salaries reflect New Jersey’s high cost of living and unions contracts that permit officers to rise quickly through the payscale. 

Saddle Brook Township’s Police Chief seems to think New Jersey’s policeforce are a well-paid profession, “Any police officer that says they’re not making enough money needs to re-examine themselves.”

Blinded by the Light: Will New Jersey finally sell off its race tracks?

Today the Star-Ledger editorial board has put it bluntly, “Get N.J. out of horse racing”, and sell the tracks.

While the Meadowlands Race Track and Monmouth Park once attracted a robust audience willing to bet and spend. Today, they are losing $10 million a year, kept alive with subsidies and casino profits. This isn’t just a Garden State phenomenon – empty seats at the races reveal that tastes change. (One theory for dwindling interest in watching the races posits technology-induced ADD.) Of course, the same can be said for any sport, the arts, or entertainment – no matter how deep its cultural roots.  Bullfighting in Barcelona is on the decline.

The casino industry is no longer amused at having to foot the bill for the tracks.  They agreed to give $90 million over three years as a protectionist measure. In return, the state agreed to keep slot machines out of the racetracks. No matter what form they take, subsidies to entertainment are a bad deal. The state should not be in the business of deciding which sports and recreations get to live past their profitability. That decision belongs to consumers.

But it’s hard for the New Jersey Sports and Exposition Authority to let go. At a recent hearing its CEO likened New Jersey’s tracks to a profitable brand, like Coca-Cola. As Governor Christie has indicated, the state can ill-afford such handouts. And more than that, as the governor discovered, the breeders associations were using tax dollars to lobby the government.

Does New Jersey like being ranked last?

New Jersey is consistently ranked one of the worst places to do business in the nation. They are 50th in the Small Business Survival Index of 2009. William Ruger and Jason Sorens rank New Jersey49th for regulatory freedom.The Tax Foundation puts N.J. 50th in state business tax climate. And ALEC ranks the Garden State 46th for economic outlook.

Sales, profits and spending in companies plunged to record lows in 2009 according to the New Jersey Business and Industry Association.

No matter how bad it gets, it’s not enough to stop the New Jersey legislature from inflicting further damage; this time, by expanding the prevailing wage. S-3028 requires it on Board of Public Utilities projects. A-4268 mandates it on maintenance-related projects. And S-3096 extends the requirement for construction and rehab work done under New Jersey Housing and Mortgage Financing Agency housing project loans.The measures will artificially inflate wages, drive up costs for contractors, drive out businesses, and pass costs to taxpayers.

Each measure accomplishes the exact reverse of stimulating jobs, economic recovery, or fiscal solvency. With measures like these one wonders if legislators think being ranked the worst place to do business  in the country is a good thing.