N.J.'s pension gains on flipping
Facing a $46 billion deficit, the fund has been buying Build America Bonds and selling them at a profit.
New Jersey's pension fund, facing a $46 billion deficit, is bolstering its finances by buying Build America Bonds from the state's debt underwriters, then selling them for a profit in as little as five days, state records show.
The pension, whose $700 million in Build America investments would make it the seventh-largest holder of the bonds, earned $2.6 million in the last year by rapidly buying and selling, or flipping, the taxable debt issued by U.S. municipalities, according to data compiled by Bloomberg.
New Jersey's ability to turn profits 17 times in five months or less shows how some borrowers in the $93.4 billion Build America market may be selling bonds at a higher cost to taxpayers than necessary, said Robert Lamb, a professor at New York University's Stern School of Business.
"This is supposed to be a wash," said Lamb, who is on the board of editors of the Municipal Finance Journal, a scholarly quarterly. "The fact they are making a market in this fashion so quickly with, it appears, little added value certainly raises certain ethical questions and may involve legal issues."
Flipping is under review by the Internal Revenue Service because the U.S. Treasury subsidizes 35 percent of Build America costs. The Municipal Securities Rulemaking Board, the market's self-regulator, is considering restrictions on how underwriters allocate the bonds among institutional and individual buyers.
"We would like to get ahead of that topic and provide further guidance," John J. Cross, associate tax legislative counsel in the U.S. Treasury Department's Office of Tax Policy, said when asked about Build America Bond pricing.
While public pensions in Pennsylvania (specifically the Public School Employees Retirement System), California and Kentucky also bought BABs, New Jersey may be unusual in both the amount it purchased and in the profits it made selling them, according to records from other states and interviews with fund managers.
New Jersey got no preferential treatment in obtaining issues, said William Clark, who was director of the state treasury's Investment Division until March 1, when he was named senior vice president and chief investment officer of the Federal Reserve System's office of employee benefits.
Ray Joseph, acting director since Clark's departure, declined to comment. The Investment Division oversees the $67.3 billion pension fund for teachers and government workers.