New Jersey Bonds Add to Pension Costs as Bills Rise

New Jersey Governor Chris Christie pauses as he participates in a discussion during the 42nd annual Conservative Political Action Conference (CPAC) February 26, 2015 in National Harbor, Maryland.

Photo by Alex Wong/Getty Images

New Jersey is confronting escalating bills from $2.8 billion of pension bonds, adding to pressure on Governor Chris Christie as the state struggles to finance its underfunded retirement system.

The payments on the debt, which was sold in 1997 to bolster the public-employee pension plans, are set to grow to almost $500 million in 2020 from $342 million this year, according to a Feb. 13 report released by the state treasurer. The annual cost will remain close to that level until the debt is paid off at the end of next decade.

“The pension debt service is skewed to the out-years,” said Richard Keevey, a fellow at Rutgers University in New Brunswick, New Jersey, who was budget director for former Governor Jim Florio, a Democrat. “It starts out low and rises sharply.”

The debt adds to taxpayers’ costs for teacher and state-employee retirement plans, which last year had about one-third of the assets needed to cover promised benefits, leaving an $83 billion shortfall. The deficit is pushing New Jersey to put more money into the funds and has contributed to a record eight credit-rating cuts under Christie, making it the lowest-ranked state after Illinois.

Pension Costs

Christie, a 52-year-old Republican, last month proposed a $33.8 billion spending plan for the year beginning in July that contributes a record $1.3 billion to the retirement system. That’s still less than the $3.1 billion the state was scheduled to pay as Christie rolled it back to help close a projected $7.35 billion deficit.

The climbing debt bills will make it more difficult for New Jersey to free up cash for the retirement system, said Daniel Solender, who helps manage $17 billion as director of munis at Lord Abbett & Co. in Jersey City. The pension bonds will cost $349 million next fiscal year and climb to $397 million in the following 12 months, according to the state’s report.

“They have to make a pension payment, too, on top of the debt service,” he said.

New Jersey’s pension shortfall has been building for more than a decade because elected officials didn’t set aside enough money to cover promised benefits. From 2001 through 2013, New Jersey made 38 percent of the required contribution each year on average, less than any other state, according to a report by the National Association of State Retirement Administrators.

Contributions Jump

The practice continued under Christie, who took office in 2010 and reckoned with soaring pension bills caused by the underfunding. By next year, his administration will have put $4.2 billion into pensions, compared with a total of $3.4 billion between 1995 and 2010, said Joseph Perone, a spokesman for the treasury.

“Governor Christie will have contributed more to the pension system than any other governor in history,” he said.

The bond issue in 1997, under Republican Governor Christine Todd Whitman, was intended to lower the state’s retirement expenses with a wager that the returns from investing the proceeds would be more than the debt payments. That strategy backfired after the stock market crashed in 2000 at the end of the Internet boom.

“Unfortunately, the state will be paying debt service on those bonds until 2029,” Perone said. “It is akin to taking out a $10,000 loan and saying that you now have $10,000 in your bank account.”

Eaten Up

Christie, a potential 2016 presidential candidate whose approval rating among state voters has tumbled, said tax collections aren’t growing fast enough to keep up.

When he proposed his budget last month, he told reporters that all of the increase in the state’s revenue “is being eaten up by growth in three areas: pension, health benefits and debt service.”

Interest and principal payments on debt will rise 15 percent next year to $3.99 billion.

“Our debt bills continue to rise, putting added pressure on our budget,” said state Senator Paul Sarlo, a Democrat from Wood-Ridge who heads the budget committee. “We are required to have a balanced budget, so when our debt service goes up we have to cut spending elsewhere.”

Investor View

Investors demand additional yield to buy New Jersey debt. An index of 10-year New Jersey bonds yielded about 2.8 percent Tuesday, 0.63 percentage point above AAA munis, data compiled by Bloomberg show. The yield gap reached 0.64 percentage point Feb. 18, the most since at least January 2013.

The pension bonds carry yields as high as 7.65 percent on debt maturing in 2026. Most can’t be repurchased from investors before they mature, which prevents New Jersey from refinancing to take advantage of lower interest rates.

Pushing the bulk of the payments toward later years is “fairly typical” because bills grow as long-dated debt matures, said Solender at Lord Abbett.

Marcy Block, a senior director with Fitch Ratings in New York, said New Jersey’s debt has added to its fiscal strains. In September, Fitch lowered its grade on New Jersey and assigned a negative outlook, signaling more cuts may be ahead. The company assesses the state A, its sixth-highest rank.

“They have a fairly hefty debt load through all their obligations,” said Block. “It makes their budget inflexible.”

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