Late last week, New Jersey settled Securities and Exchange Commission charges that it misled investors about the state of its public employee pension funds. For years, the state chronically under-funded them — a trend that Gov. Chris Christie has actually continued this year rather than raise taxes — but told investors that, somehow, it would have no problem meeting its obligations. In the settlement, New Jersey said it would change its ways but admitted no wrongdoing. And there’s more to come. Indeed, The New York Times, which first pointed out New Jersey’s questionable pension accounting in 2007, strongly hints that the agency’s attention will next turn to Illinois which, by all measures has an even larger gap than New Jersey did in 2007. But the agency shouldn’t stop there: Connecticut and Kansas both have pension funding gaps even bigger than Illinois and Florida, which actually has a conservative and solvent pension system, may have the biggest muni-bond problem of all.
Florida’s problems center around a “Hurricane Catastrophe Fund” the state runs. The Cat Fund, which Governor and Senate candidate Charlie Crist (I) expanded a great deal as one of his first acts in office, sells “reinsurance” (insurance for insurance companies) to every private insurer in the state and a state-run property insurance-selling entity called the Citizens Property Insurance Corporation. Since the Cat Fund charges less than the private market for its coverage, its actions reduce property insurance rates for people who live right along the beach. But taxpayers pick up the bill. While the very worst pension funds could easily meet half of their obligations, the Cat Fund currently has less than $7 billion in assets (much of it from bonds it has already issued) to meet liabilities that would approach $30 billion following a major storm.
The maximum size of a hypothetical Cat Fund issue would nearly double the largest in history (a $13 billion one from California). To pay the interest on these bonds, Florida would have to more than double its overall revenue collection, a near-impossible task as the state constitution forbids an income tax and caps property taxes. Most states with severe pension fund ills can probably find some combination of tax increases and service cuts to meet them in the end. But Florida might not be able to do even that.
Something doesn’t add up. But Florida, somehow, continues to offer these bonds.
The SEC should take a close look.