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Bid to Allow Public Pension System to Invest Heavily in TTF Bonds

There’s a bipartisan move to have the pension system buy more transportation fund bonds than previously allowed, in the belief it would be mutually beneficial

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Sen. Dawn Addiego (R-Burlington), Senate President Stephen Sweeney (D-Gloucester) and Assemblyman Adam Taliaferro (D-Gloucester

After going through much of the year with its future in question, New Jersey’s Transportation Trust Fund was recently shored up thanks to last month’s gas-tax hike. Now, a bipartisan group of lawmakers wants to use the restocked TTF to help out the state’s perennially underfunded public-employee pension system.

A bill introduced earlier this week would allow the $73 billion pension system to invest heavily in TTF bonds just as the state is planning to ramp up transportation spending over the next eight years.

Right now, the state Division of Investment, which manages the pension system’s assets on a day-to-day basis, is only allowed to purchase up to 10 percent of an individual bond issue. The proposed legislation would get rid of that limit, but only for TTF bonds.

The sponsors of the legislation said it makes sense to give the pension system — which is $44 billion in debt, according to the state’s estimates — the option to invest heavily in transportation fund bonds because that way all of the interest on the bonds would go into the pension system instead of to outside investors. They also said the state could save money on underwriting fees, which are levied as a percentage of the bond issues, to further stretch the TTF’s resources.

“This would offer an investment strategy that is mutually beneficial for New Jersey’s underfunded pension system and for the Transportation Trust Fund,” said Senate President Steve Sweeney (D-Gloucester). “It would enable the TTF to borrow directly from the state pension fund, providing a guaranteed rate of return much better than the pension system is currently earning on portions of its investments.”

The bill’s introduction comes as lawmakers have been trying to find new ways to help address the pension-funding issue after the state’s credit-rating was downgraded one step by S&P Global Ratings, largely due to the pension system’s ongoing problems. And that followed a new analysis by Bloomberg that determined New Jersey’s pension deficit has become the largest among U.S. states.

The legislation also comes amid a building effort to establish a public bank in New Jersey that would utilize taxpayer resources to circumvent big commercial banks by directly funding government priorities like long-term infrastructure improvements. Only one other state, North Dakota, operates such an institution, but Democratic gubernatorial hopeful Phil Murphy has made the establishment of a public bank in New Jersey a key element of his economic platform.

Under the TTF legislation enacted by Gov. Chris Christie in October, the state is planning to issue $12 billion in bonds over the next eight years to help pay for road, bridge and rail improvements. Those funds will be combined with new revenue raised by a 23-cent gas-increase that went into effect at the beginning of November to support a total of $16 billion in planned transportation spending.

The bipartisan bill seeking to allow the pension system to invest in the TTF bonds would give the Division of Investment the option to go over the 10 percent ceiling, but it would not require the agency to do so. The measure would also limit the funds that could be used by the pension system to invest in transportation fund bonds to those that have already been set aside for purchasing stakes in fixed-income securities, which have not been producing great returns in recent years. And for the pension system itself, which covers the retirements of an estimated 770,000 current and retired workers, the change in policy could also reduce the overall risk it takes on since TTF bonds are backed by constitutionally dedicated sources of revenue like the gas-tax proceeds.

“This isn’t just about money, it is also about people’s retirement,” said Sweeney, a prime sponsor of the bill.

“We guaranteed our teachers, police officers and other public workers financial safety and security at the end of their careers. We need to make sure we’re investing their retirement funds in a way that ensures we can make good on our promise, and investing in TTF is the way to do that,” he said.

“Allowing the TTF to borrow directly from the pension fund is a smart move that guarantees a rate of return while helping to support the infrastructure work that is so important to our economy,” said Sen. Dawn Marie Addiego (R-Burlington), another prime sponsor.

The credit downgrade announced by S&P last month was the 10th to be issued by one of the three major Wall Street credit-rating agencies since Christie took office in early 2010, giving him the most debt-grade reductions of any New Jersey governor.

Last month, lawmakers passed with wide bipartisan support a bill that attempts to help address the pension system’s funding gap by changing the way the state makes its pension contributions each year. Instead of making the payment in one lump sum at the end the fiscal year, which is the current practice, the bill calls for a quarterly payment schedule. That change is designed to better protect the pension contributions from falling victim to midyear budget cuts, but also to help the pension system generate bigger returns by getting more money into its investments as soon as possible.

Christie, a Republican, has yet to take action on that bill, but Sweeney and other sponsors have said they expect him to sign it before the end of the year.

Spokesmen for the state Department of Treasury declined to comment yesterday on the new TTF-investment legislation, citing the department’s general policy of not discussing any pending legislation.

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