One more example of Yankee ingenuity

[tyro]

New York Plan Makes Fund Both Borrower and Lender
By DANNY HAKIM
Published: June 11, 2010

ALBANY — Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund.
And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.

Source

[Lord Jim]

Well I've heard of "robbing Peter to pay Paul", but this looks more like "robbing Peter to pay.......Peter"....

Maybe this isn't as weird as it looks....

I assume the pension fund itself is solvent, and therefore has funds to lend. Because of the current economic situation, the state and localities are experiencing revenue shortfalls making it difficult for them to meet their current legal obligations to pay in to the fund. This could even turn out to be a good deal for the fund, because presumably the money is being lent with some rate of interest, so that when it is paid back, the fund should actually be ahead.

[rubato]

New York Plan Makes Fund Both Borrower and Lender
By DANNY HAKIM
Published: June 11, 2010

ALBANY — Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund.
And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.

Source

Just a way of kicking the can down the road and pretending a problem does not exist while it gets ever-larger. This allows state and local government to pretend to have 'covered their numbers' and avoid making hard decisions.

This way, when the problem is no longer avoidable it will be a calamity instead of a mere crisis or disaster.

yrs,
rubato

[Scooter]

It's not really any different from any other sort of deficit financing, except that in this case the creditors are the employees and pensioners of the state.

I would prefer that to having them borrow the money from the Chinese.

[tyro]

As I understood the rest of the article, the state and some municipalities are unable to make their contribution to the pension fund, and so they are asking to borrow from it to make payment.

In big business, when they dip into the pension fund for needed money, you know that the company is in deep trouble and the pension plan is about to go down first.

When it comes to elected officials, they are simply magnifying the problem for subsequent administrations. Thus the expression to “kick the can down the road.”

[Scooter]

Which rather defines deficit financing of any type, no?

[dales]

Same con as GM used when they crowed about paying back the bail out money.

From the same bail out fund.

[rubato]

It's not really any different from any other sort of deficit financing, except that in this case the creditors are the employees and pensioners of the state.

I would prefer that to having them borrow the money from the Chinese.

I would much prefer they had to borrow from some external agent, like the Chinese, who would supply discipline in the form of interest rates which reflect the real risks of their financial position. Also, if they default the pension fund will be fully funded, the state and local employees will not lose their pensions, and the debt holders will be SOL like the Orange County bond holders were.

This is the road to nearly certain disaster. It removes incentive for the legislators and the electorate to deal with their real problems now when they are smaller and cheaper and allows the problem to expand geometrically.

yrs,
rubato

[Guinevere]

Most certainly the pension fund is *not* solvent, or more likely the definition of solvency has been slowing eroding. Pension fund obligations are going to bankrupt more and more municipaliaties over the next five years. If you think we can't pay teachers, cops, and firefighters, wait until the pension obligations get to their full head of steam. I don't know what the answer is -- but it most certainly is *not* what NYS is doing.

[Gob]

How do pension funds work over there, are they guaranteed by the state?

[rubato]

Federally, by the Pension Benefit Guaranty Trust. I don't know if this also applies to muni and state pensions, though. It is funded by a fee based on the outstanding pension obligations of the institution (like FDIC) and the PBGT provides a level of oversight and can require an underfunded pension to put in more cash.

Pensions are guaranteed up to a certain limit (which I don't recall at the moment), also like FDIC. If your pension entitles you to, let us say, $80,000/yr and the limit is $40,000/yr, you are SOL for the difference.

Many State and municipal pensions have provided very over-generous benefits because doing so cost little in the present.

yrs,
rubato

[Scooter]

The benefits are only "over-generous" if they can't be fully funded. The NYS pension plan was fully funded up until the current crisis, being one of the few public pension plans in the U.S. that can say that. The reason it is having problems now is the combination of the huge drop in the value of its equity investments combined with a drop in tax revenues which is impairing the ability of the participating employers (state and municipal gov'ts) to increase contributions to make up the difference. Employer contributions will have to close to triple over the next three years in order to make up the investment losses. By borrowing the $6 billion from the pension fund, they are in essence deferring some of those extraordinary contributions to future years, when investment gains from the recovery will greatly reduce the required contributions, and thus give state and local gov'ts the room to pay back the debt. In this case it is a smoothing of contributions due to extraordinary events, rather than an attempt to mask a systemic shortfall.