New Jersey Grapples With Cost of Pension Bonds Issued in ’90s


In 1997, New Jersey issued $2.8 billion of pension bonds to shore up its underfunded retirement system.

The success of such a plan depends on investment returns outpacing interest payments. But the ensuing dot-com crash threw a wrench into the plan’s efficacy, and more than 15 years later, New Jersey is now dealing with the cost of the bonds.

More on the mounting debt service payments, from Bloomberg:

The payments on the debt, which was sold in 1997 to bolster the public-employee pension plans, are set to grow to almost $500 million in 2020 from $342 million this year, according to a Feb. 13 report released by the state treasurer. The annual cost will remain close to that level until the debt is paid off at the end of next decade.

“The pension debt service is skewed to the out-years,” said Richard Keevey, a fellow at Rutgers University in New Brunswick, New Jersey, who was budget director for former Governor Jim Florio, a Democrat. “It starts out low and rises sharply.”


Interest and principal payments on debt will rise 15 percent next year to $3.99 billion.

Investors demand additional yield to buy New Jersey debt. An index of 10-year New Jersey bonds yielded about 2.8 percent Tuesday, 0.63 percentage point above AAA munis, data compiled by Bloomberg show. The yield gap reached 0.64 percentage point Feb. 18, the most since at least January 2013.

The pension bonds carry yields as high as 7.65 percent on debt maturing in 2026. Most can’t be repurchased from investors before they mature, which prevents New Jersey from refinancing to take advantage of lower interest rates.

The pension bonds will cost $350 million in FY 2015-16 and $397 million in FY 2016-17, according to the state treasurer’s report.


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