Jon Reitmeyer of NJSpotlight writes that State Treasury officials support the idea of issuing $4 billion in bonds so the State can make a $4.9 billion pension contribution ($4.2 billion of which is making up for past pension underfunding).  The idea is apparently that the State can borrow at 2% (at an annual cost of $400 million) and “earn” the 7% assumed rate of return.

But this arbitrage is the same rationale that supported the disastrous pension obligation bond deal (POB) deal in 1997.  That POB deal between the NJEA and Governor Whitman borrowed $2.8 billion but will ultimately end up costing the state over $10 billion.  That’s the reason why legislature banned POBs subsequently.

But using bonds to fund the pension contribution is in effect issuing POBs again.  Yes, the borrowing rate will be lower than in 1997, but stocks can go up and down.  In any year that returns are negative, NJ will be effectively adding minus $400 million to whatever investment losses there are.

Moreover, NJ would be using debt to pay off debt, which just kicks the can down the road.  The bond-rating agency S&P said it best: our review “will particularly focus on the ultimate size of the structural budget deficit and how it might persist into future fiscal years.  We will also be evaluating the state’s liability structure in light of the adopted budget’s amount of new bonding.”

In other words, debt is debt.  Reducing $4.2 billion of pension debt by issuing $4 billion of bonds does not improve the state’s overall fiscal condition.  It just pours good money after bad and passes the costs on to future generations.