Raising Taxes Won’t Help You, Mr. Murphy!

New Jersey Governor Phil Murphy is trying to convince both parties that what NJ needs is more taxes as if we aren’t taxed enough! However, to Murphy’s credit, he’s not leaving anyone out in his quest for additional revenue as his proposal includes an increase in state sales, income, and business taxes.  Good luck!

Of course, this tax increase comes at us just after the “benefits” of federal tax changes that adversely impacted any NJ resident that has more than $10,000 in combined state and local taxes, which likely includes most everybody.  Given this development, we cannot raise taxes without likely driving businesses and individuals (usually the well-heeled) from the Garden State. But, we have a massively underfunded defined benefit plan that needs to be addressed before it places an even greater burden on the social safety net that must be protected and funded, too. What to do?

We believe that New Jersey would improve its economic lot if they would direct those running the pension system to refocus their attention from trying to generate a return in excess of the 7.5% return on asset assumption (ROA) to one focused on the promise (benefits) that has been made to the plan participants. It was the focus on the ROA that lead them to move a significant chunk of assets into hedge funds at the bottom of the market in 2009, instead of buying cheap beta at a 50% discount. Not surprising at all that the results have been less than stellar.

To help close the significant funding gap NJ should look into the process that supports the Butch Lewis Act legislation that is currently under review by the Joint Select Committee on Solvency of Multiemployer plans.  Long-term interest rates haven’t risen nearly as fast as feared, and as a result, the interest rate environment is still providing opportunities to borrow at these levels. NJ would be wise to issue a pension obligation bond (POB) and then use the proceeds to cash flow match the retired lives, which would help reduce plan volatility and provide a longer investing horizon for the balance of the assets to meet future plan liabilities.

Permitting the current asset base to swing with the mood of the market is foolish when strategies exist that could help the pension system stabilize the funded status and contribution expense in a challenging funding environment. Raising taxes in this environment will likely cause much more economic harm than good. Real pension reform is the answer.

 

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