By: Mark Glennon*
“Our state pensions are really only 33% funded, not 54% as we have been telling you.” That’s a pretty fair summary of what New Jersey officially said yesterday to its potential bond buyers. Adding in two large local pensions, the funded ratio dropped from 63% to 44%.
The statement was made in the form of a short, clear supplement to an Official Statement for a pending sale of New Jersey general obligation bonds. That supplement is linked here, and an article about it from Pensions & Investments is linked here. An Official Statement is the big document bond issuers publish, the primary purpose of which is to notify potential buyers of financial matters material to the safety of the bonds.
Specifically, what New Jersey did was clearly state it’s pension deficits using new accounting rules from the Governmental Accounting Standards Board. Like Illinois, New Jersey has it’s own statutory methods for tracking pensions and determining annual contributions, which GASB decided are junk, so it issued its own standards.
Bond issuers face liability for materially false or misleading statements in Official Statements. The lawyers behind New Jersey’s Official Statement evidently saw the need to make a clear, stand-alone statement about GASB-based (i.e., realistic) numbers in addition to the official (i.e., junk) numbers used by the state.
Illinois is in the same situation but it has yet to issue bonds since the new GASB rules went fully into effect on July 1. It’s now keeping two sets of books, absurdly, as we described in this earlier article. In Illinois’ last Official Statement, in May, it took the kitchen sink approach to disclosure. See it here for yourself. It’s 144 pages of very dense material, alternative calculations, historical comparisons, and cross references to other documents, from which even financial professionals would have a hard time extracting what’s important.
I pity the lawyers who will have to draft the next Illinois Offering Statement, having done some of that work in my past life as a lawyer. In that connection, I have been skimming through the hundreds of pages of documents filed by the Illinois Attorney General in the SB1 pension litigation to support its “police powers” defense — that the state is too broke the pay pension obligations as now scheduled. At a minimum, I would think the horror story told by the A.G. would have to be incorporated in the Official Statement.
I would certainly also want to call out the new calculations under GASB rules as clearly as has New Jersey.
But at the end of the day, I’m pretty sure I would pull my hair out and instead want a one-page Official Statement saying something like this:
Illinois is insolvent. Most claims against it, at some point, one way or another, must be cut back substantially if the state is to function, but we don’t know which ones or how much. If you buy these bonds, you are betting on the payment priority that’s supposed to assure that general obligation bonds get paid ahead of other claims, and it’s up to you to decide if that will hold up.
Mark Glennon is founder of WirePoints*