NJ Gas Tax and Pensions ?>

NJ Gas Tax and Pensions

The New Jersey Legislature raised the state motor fuels tax on 1 November 2016.  A week later, voters endorsed a measure to dedicate those gas taxes to transportation projects.  The combination of those events under NJ law makes possible the issuance of $12 billion in Transportation Trust Fund bonds.

It was only a matter of time before politicians started scheming to capture some of the billion dollar a year revenue flow from the gas tax increase.  Steve Sweeney has proposed that the state’s pension fund invest in Transportation Trust Fund bonds.

This is not an original idea.  The federal government does the same every year.  The Social Security Trust Fund invests each year in U.S Treasury bonds.

At one level, it is simple a bookkeeping entry that shifts funds from one government pocket to another.  At another level, it is a means of transferring the cost of teachers’ pensions from the General Fund and the stock market to motorists.

The state’s pension fund is currently invested mostly in stocks and only 1.47% in Treasury bonds.  There is good reason for that.  teachers pension

Thirty-year Treasuries yield about 3.1%.  TTF bonds will likely yield about 5.0%.  Stocks, over the long haul, yield more.  U.S. Treasuries are not a wise long term investment choice for the state’s pension fund.  They have the advantage of being very liquid (easy to sell) and are by definition, the lowest risk investment.  Not so for TTF bonds.  New Jersey bonds are much higher risk than Treasuries.  Even at 5.0% yield, they don’t do much for the states’ pension portfolio.

By one estimation method, the state has pension liabilities of $145.8 billion, which leaves the state $59 billion short.  By another calculation method, the state has pension liabilities of $217 billion, leaving the state $135 billion short.  No one is perfect at estimating the rate of return on the portfolio or the cost of providing pensions and health care.  If we assume the real answer is halfway between the two, it amounts to $10,700 per resident of New Jersey.  If we’re hoping that the stock market will pull us out of this hole, there is no point investing in fixed income securities, whether Treasuries at 3.0% or TTF bonds at 5.0%.  The pension fund needs a return of 7.9% to stay even.

Not a wise investment choice

TTF bonds are not a wise investment choice for the state pension fund.

One should consider Sweeney’s motivation in suggesting that the state’s pension fund invest in TTF bonds.  Either he doesn’t understand portfolio management, or he intends to sabotage the NJ pension funds.  Another possibility is that he wants to make the political choice to borrow $12 billion for transportation projects easier to swallow.  We could spend the gas tax a billion a year as it rolls in, or we could borrow and spend $12 billion immediately.  That would please the state’s construction unions.

Borrowing based on the gas tax income is a bad idea for reasons described here.

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