March isn’t half over yet — but we already have a winner! Even with the state budget unsettled (with all that implies, bad ideas-wise), the worst idea of the month is surely a proposal by state Sen. Carl Kruger for avoiding East River bridge tolls by arbitraging a bond issue through the state pension fund.
Kruger’s immediate motivation is the Senate Majority’s need to come up with an alternative to the Ravitch Commission’s proposal to raise cash for the Metropolitan Transportation Authority (MTA) by (among other things) imposing tolls on the currently toll-free East River bridges, which outer-borough lawmakers strongly oppose.
And so, from the Senator’s news release today (unposted but passed along by a Capitol source), a plan he says “won’t cost taxpayers a cent”:
Under [the] proposal, legislation would be enacted to create an asset management group — a public benefit trust which would then own the free bridges. This new state agency would borrow $4.25 billion through the issuing of a 30-year bond, give about $1 billion of that sum to the MTA and invest the remaining $3.25 billion with the state’s common retirement system.
“Over 30 years the retirement system has boasted a minimum return of more than 6 percent – and an average return of over 10 percent during the pension system’s 79-year history,” said Sen. Kruger.
“That historical rate of return would allow the bond to be paid off in its entirety and cost the taxpayers nothing,” he said. “The MTA would reap $1 billion from the deal and the rest of us would avoid the grim prospect of tolls, which are nothing more than a back-door approach to congestion pricing offered by the Manhattan elite.”
To pay debt service on $4.25 billion in bonds issued at, say, 5.25 percent, a back-of-the-envelope estimate suggests a $3.25 billion “investment” in the pension fund would need to return 8.7 percent a year. But Sen. Kruger seems unaware that the retirement fund’s “historical rate of return” is … history.
During the fiscal year ending June 30, 2008, the pension fund gained just 2.6 percent–well short of its 8 percent target rate. As of Dec. 31, the fund had lost 21 percent of its value, according to state Comptroller Thomas DiNapoli. Since then, needless to say, its asset values have plummeted further. At the rate things are going, the fund will be lucky to hold its losses to 30 percent in the current year. And the recovery outlook isn’t great: Wall Street economist Henry Kaufman is not alone in predicting returns of just 4 to 5 percent over the next five years. In that case, tax-funded employer contributions to the pension fund will be skyrocketing.
If the fund’s returns fall short of Kruger’s expectations, his bridge bonds could only be serviced by siphoning more cash from the same shrinking pension pool–which, come to think of it, means this idea probably violates the anti-impairment clause (Article V, Section 7) of the New York State Constitution.
As an alternative, the bonds could be secured by the bridges themselves, but the bridges theoretically have value only because they could be tolled. More likely, the bonds would ultimately be backstopped in the usual Albany fashion: by a pledge of state personal income tax revenues. Which are also plummeting.
By the way, Sen. Kruger (D-Brooklyn) isn’t just another back-bencher. He also is chairman of the state Senate Finance Committee, which makes him the new Senate majority’s key player on money issues.
Meanwhile, if it’s solid returns the senator wants, there’s an obvious better choice.
And, in another sign of the Senate Democrats’ desperation to come up with another plan for funding the MTA, the Transportation Committee chair is floating a gas tax.
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