MuniLand

New Jersey’s battering ram

Chris Christie rode to national prominence when he publicly excoriated a New Jersey teacher and other citizens over differences in opinion in town hall meetings. In contrast to the plain vanilla politispeak of most public officials, his blunt, confrontational style of governing was seen as a breath of fresh air. Christie either has a naturally combative governing style or believes that choosing a new target will get the national spotlight back on him. Or maybe he just wants to create a legacy as New Jersey’s most powerful battering ram.

Christie’s latest target is New Jersey state judges. Since no federal law other than IRS statutes has jurisdiction over public pensions, state judges are the chief interpreters of what is owed to public-sector retirees. A New Jersey judge recently overturned a pension reform that Christie spearheaded and that the state legislature passed in the spring. This new law would have required state judges to increase their pension payments from 3 percent of their salary to 12 percent over seven years and make a much bigger contribution to towards their health care costs.

Now, New Jersey’s constitution prohibits the governor or the legislature from reducing the salaries of state judges.  The framers included this provision to insulate the judiciary from the types of political attacks that Christie is making on them.

It’s important to note that there are sound legal disagreements about the judge’s ruling and the attorney general has filed an appeal to the state supreme court. That said, Christie’s response to the court ruling was confrontational and condescending:

The governor, instead, turned venomous. He attacked [the judge]’s integrity and accused her of “protecting her own pocketbook and those of her colleagues.” He called her the reason “why the public has grown to have such little faith in the objectivity of the judiciary.”

The Christie discount

The Christie discount

The media is reporting that New Jersey Governor Chris Christie will announce that he is not running for the Republican presidential nomination this afternoon. That’s probably wise given that the credit markets’ opinion of New Jersey would undercut any claim candidate Christie could make to being a responsible budget manager.

If you look at the Markit municipal credit default swap chart above you can see that credit markets think that the financial condition of New Jersey is pretty bad. It ranks only behind California and Illinois as a poor credit risk. It would be very hard for Governor Christie to tell the story of his fiscal successes in his state given the data. To be a credible candidate for the presidency he needs to develop real improvement for his state and reverse the Christie discount.

Here is the real muniland story

From the blog Credit Writedowns:

US states and local governments cut their debt by 3.2% in Q2 and 4.2% in Q1. This year looks to be the first year since 1996 that local governments in the US reduced their indebtedness.

Christie’s big packaging

Our nation is overdue for an overweight leader. President William Howard Taft, seen at left, was a heavy man who had accomplished a lot when he completed his term in 1913. His successes laid the groundwork for exceptional economic growth for the century. Wikipedia says:

His domestic agenda emphasized trust-busting, civil service reform, strengthening the Interstate Commerce Commission, improving the performance of the postal service, and passage of the Sixteenth Amendment.

The 16th amendment allowed the federal government to assess an income tax without apportioning it among the states or basing it on Census results. The big man had impressive results in his term of office.

Muniland Absurdity of the Year Award

The small town of Collingswood, New Jersey is facing some rough sledding in the next 90 days as it attempts to raise cash to pay off loan guarantees it made on behalf of a local condo and commercial development.

The private project, The Lumberyards, originated in 2006 with funding from TICIC, a consortium of New Jersey banks that provided $18,000,000 in construction loans to Lumberyard Condominiums. After completing about one third of the project the developers encountered weak demand when the housing market and economy softened following the 2008 financial crisis. The developers are now broke and have turned to the town of Collingswood, their municipal guarantor, to repay the loan to TICIC.

Moody’s downgraded the town six notches due to its weak financial position and the difficulty it will face in repaying the loan to TICIC. Moody’s picks up the tale:

The unsustainability of public pensions

Public pensioners everywhere should be worried today. There is devastating news from Central Falls, Rhode Island as the city’s receiver has cut the monthly pension payments to retirees. From WPRI.com:

Central Falls slashed one in three of its retirees’ pension checks by more than half this month, with the majority of the city’s former public-safety workers set to lose tens of thousands of dollars a year.

Receiver Robert Flanders reduced 48 of the city’s 141 police and fire pensions by 50% or more, with all but three of those cut 55% from their original amount, according to financial records obtained by WPRI.com.

Irene damage estimated at 0.214% of GDP

Irene has come and gone. She was a big girl but fortunately she didn’t cost a lot in terms of economic damages. The biggest toll was the 25 lives she claimed. I mourn those deaths and know their loss is incalculable to their families.

Local, county and state officials responded to the disaster admirably. Local newspapers and television stations are full of stories of families evacuated and emergency measures taken. New Jersey and New York City preemptively evacuated millions of people and shut down mass transit and other infrastructure systems. Given the scale of potential damage the losses have not been that great.

The economic loss of Hurricane Irene has been estimated at approximately $3 – 4 billion. Measured against a gross domestic product of $14 trillion Irene will ding the economy for about 0.214% of its annual output. Some have suggested that this will give the construction industry a boost, but it’s not significant. Irene’s damage, on its own, is not a substantial blow to the U.S. economy, but nine other “weather disasters” have caused more than $35 billion in damages this year, according to the National Climatic Data Center at the U.S. Department of Commerce (hat tip Empty Wheel).

We have everything we need to battle Irene


Hurricane Irene, an enormous storm of unimaginable power, is bearing down on the east coast. Although there could be loss of life and substantial property devastation, America has more than enough resources to meet her and survive mostly intact. Unlike third-world countries we have the people, equipment and money in reserve to clean up. But it maybe the human locusts that follow in her wake that are hardest to battle against.

Irene is expected to make landfall in North Carolina, but it is the northeastern states that have made extraordinary efforts to evacuate the population and shut down public transportation systems. The corridor stretching from New Haven, CT to Atlantic City, NJ is one of the most densely populated areas in America; 55 million people are currently preparing for this large natural disaster.

Cities, counties, states and utility companies are on standby. Funds have been reserved to respond to emergencies and the federal government has a large department, the Federal Emergency Management Agency, ready to provide local assistance. The public sector is ready to go.

Does a downgrade cost anything?

The debt of the United States was downgraded by Standard & Poor’s several weeks ago, but the price of U.S. Treasuries have skyrocketed since then. This confuses many people because a baseline relationship in the fixed-income markets is that lower-rated, less-creditworthy bonds will be relatively cheap and investors will demand higher interest rates to compensate for additional risk.

To see this bond market truism, it’s much more instructive to look at the downgrade of the debt of New Jersey. Fitch lowered the state’s credit rating Wednesday citing heavy debt and benefit obligations. This followed downgrades by Moody’s and S&P earlier in the year. Municipal bond and credit default swap markets didn’t like this third downgrade and did what you would expect them to do: they required more yield in the case of cash bonds and more payment in the case of credit default swaps.

The graph above charts muni CDS prices for New Jersey (data supplied by Markit). You can see the move up in CDS prices began in June when Governor Christie and the state legislature made the final run to their agreement on the fiscal 2011 budget, which began on July 1. The uncertainty and contentiousness of the process must have spooked investors and dealers.

New Jersey downgraded again: Christie “miracle” debunked

New Jersey downgraded again

Yesterday Fitch joined Moody’s and S&P in downgrading the state of New Jersey to AA-, the fourth lowest investment-grade rating. This places New Jersey in the lowest 10% of states in terms credit quality and deflates the story of Governor Chris Christie’s repair of the state’s unfunded pension liabilities. From Bloomberg:

A bill putting more of the pension and health-care burden on employees, signed by Governor Chris Christie in June, won’t prevent the need for increased state contributions, Fitch said yesterday in a report. Other negatives were a weak economic recovery, persistent deficits and high debt, the company said.

Christie, a 48-year-old Republican, signed a $29.7 billion budget in June in which he vetoed about $1 billion in spending added by Democrats who control both the state Senate and the Assembly. The spending included a pension payment of about $480 million, below the $3 billion recommended by actuaries. The state hasn’t made full payments into its pension system for most of the past decade.

Relying on the rich uncle

State and local governments earn their “wages” primarily by collecting taxes, although states get significant “flow-throughs” from the federal government for Medicaid and other social entitlements. Every state varies in where they draw tax revenues from. For example, states that are highly dependent on tourism will see substantial revenues from hotel and sales taxes.

New York and New Jersey are two well-to do states that have historically relied on sharing in the largesse of their rich uncle from Wall Street. The Federal Reserve Bank of New York published an interesting paper last year that talked about how these two states were heavily reliant on tax revenues from the financial sector and were especially affected by the financial crisis of 2007-2009. Wall Street revenues rebounded sharply in 2009 and 2010 but are now sputtering and projected to decline going forward due to financial reform and the slow pace of recovery.

One recommendation of the Federal Reserve’s research staff was to have a reduced reliance on personal-income taxes, which fluctuate with the economy, and a greater reliance on sales taxes, which tend to be more stable. Unfortunately, sales taxes tend to be regressive and place a heavier burden on the poor, who spend the bulk of their income on consumption.

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