Aug. 10 (Bloomberg) -- Jersey City, New Jersey’s second-largest municipality, borrowed $19 million in the past two years to cover retiring workers’ unused sick and vacation time. Similar deals by other communities are helping double the penalty the state and municipalities are paying on their bonds.
While Governor Chris Christie wants those payouts eliminated, the current legislative session ended in June without lawmakers acting. The impasse between Christie, 49, and Democrats, the majority party in the Senate and House, has been going on since the Republican governor took office in 2010.
“I will not compromise on the issue that we should no longer have cash value attached to sick leave,” Christie told reporters on Aug. 6 in Middlesex. “That’s a matter of principle for me.”
Christie calls the payouts “boat checks” because they can top $200,000 and some retirees use them to buy watercraft. Growing obligations for workers’ retirement benefits have stressed city budgets from San Jose to Long Beach, New York. Officials say some perks can no longer be sustained as they struggle to balance revenue with spending.
In New Jersey, 428 municipalities faced liabilities of $825 million as of May 2011 for accumulated sick and vacation days, according to Christie’s office. Boat checks and New Jersey’s $42 billion unfunded pension obligation are helping raise borrowing costs for the state and its cities in the $3.7 trillion municipal-bond market.
New Jersey and its localities are paying an average yield penalty of 0.57 percentage point over AAA securities to borrow for 10 years, according to data compiled by Bloomberg. The gap is more than double the five-year average. It was 0.35 percentage point the day Christie took office.
Towns in New Jersey paid workers $43 million for unused sick and vacation time in 2010, according to Christie.
Jersey City, a community of almost 248,000 across the Hudson River from downtown Manhattan, has made payouts to 343 retirees since the governor vetoed a bill in late 2010 that would have capped the checks at $15,000. Christie also spurned a $7,500 limit.
Newark, East Orange and Hackensack have also borrowed to make the payments as workers retired ahead of Christie raising their pension and benefits contributions.
“The reforms in Trenton caused a stampede to the door,” Jersey City Mayor Jerramiah Healy, a Democrat, said in a telephone interview.
A Jersey City general-obligation bond due in 10 years and rated Aa3, Moody’s Investors Service’s fourth-highest grade, traded Aug. 6 with an average yield of 2.71 percent, 1.02 percentage point above top-rated municipals with similar maturity, according to data compiled by Bloomberg. That yield difference is down from a 1.23 percentage-point spread on a Dec. 21 trade in the week the city sold the bonds.
Jersey City, which has a budget of $485 million, will continue to be squeezed by the cost for unused leave payouts unless Christie and lawmakers act, Healy said. A cap would be a good start, and then the payments could be lowered or eliminated in the future, the mayor said.
“The governor in his search for the perfect has abandoned the good,” Healy said. “To carry on in this fashion is just not sustainable for any city, any government or the taxpayers.”
The governor had sought a plan that would have required employees to burn through amassed sick time before using new days off. Democrats have balked at that provision, saying the state can’t strip employees of a benefit they’ve already earned.
“Sick leave should be for when you are sick -- not a supplemental retirement fund,” said Assemblyman Declan O’Scanlon, a Republican from Little Silver who sponsored a bill to stop workers from amassing the payouts.
Even a $7,500 cap would cost taxpayers $3.25 billion if all 434,000 public workers retired, Christie said.
Senate President Stephen Sweeney, a Democrat from West Deptford, in February proposed legislation that would stop current employees from amassing more for the payments and end them for new hires. Christie called the plan “encouraging.” No hearings have been scheduled on Sweeney’s measure.
Public-employee retirements in New Jersey jumped 45 percent in 2010 as Christie pushed proposals to raise their pension and health-care contributions, and 10 percent last year as he enacted them. Workers are retiring at a slower pace this year, and filings are on track to drop 30 percent in 2012, based on data from the state Treasury Department as of July 20.
Julien Neals, business administrator in Newark, said he doesn’t expect a repeat of 2010, when the state’s largest city had to borrow $7 million to cover checks to more than 800 people for unused sick and vacation days. The city caps the awards at $15,000, he said. Yet with an additional 80 police and fire retirements expected this year, Neals said the payouts will still put a dent in the budget.
John Mousseau, a portfolio manager at Cumberland Advisors in Vineland, New Jersey, said allowing workers to cash out unused days is a “meat-ax” issue: someplace local governments can make a big dent in spending with one trim. The expense is weighing on cities as they deal with less state aid and higher pension contributions, he said.
“Here’s another thing that is wrong, and clearly it needs to be changed,” said Mousseau, whose firm manages $2.2 billion, including $1.2 billion of municipal bonds. “What you’re doing is raising another liability at an increasing rate for really what is no reason at all.”
Following are pending sales:
ENERGY NORTHWEST, which provides electricity to 1.5 million customers in Washington, is set to borrow $777 million of electric revenue bonds, including taxable debt, as soon as next week, Bloomberg data show. Bond proceeds will help finance fuel purchases and capital upgrade, according to bond documents. Standard & Poor’s rates the bonds AA-, its fourth-highest grade. (Added Aug. 10)
CALIFORNIA plans to issue $10 billion of revenue-anticipate notes as soon as soon as next week. The notes are rated MIG 1, Moody’s highest short-term grade. (Updated Aug. 9)
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