If New Jersey and other pension-pressured states look for federal help during a possible upcoming recession, the Manhattan Institute’s Steven Malanga sees just one option: a special bankruptcy provision like the one created for Puerto Rico.
Were the US Congress to create something akin to the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), a law enacted 2016 to help the US territory, it would allow states to put their troubled pension systems into bankruptcy where they can negotiate before a judge to devise a plan to cut liabilities and, perhaps, increase system revenues, Malanga, a Manhattan Institute senior fellow, said.
“Short of that, I don't see a bailout plan gaining traction unless something drastic changes,” Malanga said.
In New Jersey, as well as places like Illinois and Connecticut, some expectation likely exists that federal help, in some form, will be needed to bridge pension gaps, according to Bill Bergman, director of research at Chicago-based Truth in Accounting (TIA). Washington, however, appears to have little appetite for that judging from a recently introduced US Senate bill that would prevent federal dollars from being used for state bailouts, Bergman said.
However, time will tell if states and cities threatened by bad financial conditions end up prevailing in Washington, he said.
New Jersey hit a dubious milestone recently – for the fifth year in a row it ranked as the state with the nation’s worst finances, according to TIA’s 2019 Financial State of the States report released in September, its tenth such annual report. New Jersey’s financial situation has worsened since fiscal year 2009, despite a favorable economy, Bergman said.
A worsening economy could set the stage for fireworks between taxpayers and bondholders, he said.
As with any deteriorating situation from corporations to states, once the “writing is on the wall,” stakeholders look to secure their positions by gaining seniority in the credit structure, Bergman said. For example, bond investors may look increasingly for debt secured by special revenues, he said.
“When that happens, the taxpayers and citizens have increased reason for concern because bondholders and citizens and taxpayers aren’t always on the same page,” Bergman said, adding that citizens and taxpayers could end up with fewer services and higher taxes. “So that’s where I think the fireworks will happen in challenged districts like New Jersey.”
Repeated financial decisions by New Jersey elected officials have saddled the state with a debt burden of USD 208.8bn, according to TIA’s 2019 report, which is based on data from New Jersey’s Comprehensive Annual Financial Report for the fiscal year ended 30 June 2018 and retirement plan reports. That burden equates to USD 65,100 for every New Jersey taxpayer, TIA’s report said.
New Jersey’s financial woes stem mainly from unfunded retirement obligations that have piled up over the years. Of USD 242.4bn in promised retirement benefits, it hasn’t funded USD 98.8 bn in pension and USD 91.8bn in retiree healthcare benefits, the report said.
Any move to raise taxes is likely to meet resistance from New Jersey residents, where taxpayers are already voting with their feet, according to Bergman. He pointed to United Van Lines' 42nd Annual National Movers Study, which showed that more residents moved out of New Jersey than any other state in 2018.
People in states where governments routinely spend more than they take in understand the threat it poses to future taxpayers, Bergman said.
“And more and more people don’t want to be those future taxpayers,” he said.
New Jersey responds
New Jersey is “acutely aware” of its increasing fiscal needs, “particularly our pension costs as we continue ramping up payments to get to the full actuarially recommended contribution,” New Jersey Treasurer’s office spokesperson Jennifer Sciortino said.
After decades of neglect from state leadership on both sides of the aisle, Governor Phil Murphy (D) is committed to improving pension system solvency, making the two largest contributions in state history over the past two years, Sciortino said.
“The governor has also laid out a broad strategy to meet these increasing costs and other growing obligations, which includes growing the economy; continuing the dogged pursuit of smart, strategic savings; and identifying reliable, recurring revenue sources,” she said.
Butch Lewis Act
State pension plans aren’t alone in their troubles. H.R. 397, the Rehabilitation for Multiemployer Pensions Act, also known as the Butch Lewis Act, passed the US House of Representatives in July. A multiemployer plan is generally a collectively bargained pension plan maintained by more than one unrelated employer, typically in the same or linked industries, and one or more labor unions, according to the Pension Benefit Guaranty Corporation, a US government agency tasked with safeguarding the pension benefits of those in private-sector plans.
The act calls for setting up a new office within the US Department of the Treasury called the Pension Rehabilitation Administration (PRA), according a press release from the office of US Rep. Emanuel Cleaver, II (D-MO), who voted for the bill. The PRA would sell Treasury-issued bonds to big investors such as financial firms, and then lend the proceeds to financially struggling pension plans through long-term, low-interest loans, the press release said.
While it’s possible that some “creative minds” in states with pension woes “are thinking along those lines,” people in places like Utah and Nebraska are unlikely to want to their tax dollars used to solve New Jersey’s pension problems, Bergman said.
Malanga doubts Butch Lewis stands much chance of becoming law, though a lot depends on who controls Congress and the White House after the 2020 elections, he said.
As for state pension systems, several proposals seeking federal help have already been advanced and rejected, including one put forth by New Jersey Senate President Steve Sweeney (D), Malanga said. Sen. Sweeney in 2015 proposed a federal loan program to help relieve unfunded state pension liabilities, according to press reports at the time. The senator emphasized it would be a loan, not a handout, Politico reported.
“Representatives of other states, regardless of their party, don't want to bail out these places because voters in places that don't have problems regard this as a state failure and not their responsibility,” Malanga said, adding the reception for federal help might be different if the states agreed to significant program reforms such as switching pensions to a 401k-style program in exchange for aid.
Three US senators would certainly appear to agree about where responsibility lies. In July, Senators Todd Young (R-IN), Pat Toomey (R-PA) and Tom Cotton (R-AR) introduced the Government Bailout Prevention Act, which would ensure that no federal dollars can be used “to help insolvent state, territory, or local governments pay off their obligations,” according to a 15 July press release from Sen. Young’s office.
Taxpayers shouldn’t have to bail out failing industries, and the same applies to state and local governments that have mismanaged themselves into bankruptcy, Sen. Toomey said in the release.
“Now some in Washington are pushing for the Federal Reserve and other federal agencies to spend billions to clean up these mistakes -- which is unfair,” Toomey said.
Moody’s Investors Service assigned an underlying rating of A3 to the GO bonds, while S&P Global Ratings assigned an A- rating, according to their respective websites. Fitch Ratings assigned an A rating, according to Electronic Municipal Market Access.