New Jersey Pays Goldman Sachs to Protect Non-Existent Bonds
New Jerseyites worried about where their tax dollars are going can rest assured that it's to a worthy cause: Goldman Sachs.
Bloomberg details a program under which residents of the financially strapped state are paying a partnership run by the investment bank nearly $1 million a month to guard against rising interest costs on auction-rate debt. The best part is that the bonds were redeemed more than a year ago. That's right -- the paper is history.
The most-densely populated U.S. state is making the payments under an agreement made during the administration of former Governor James E. McGreevey in 2003, when New Jersey's Transportation Trust Fund Authority sold $345 million in auction-rate bonds whose yields fluctuated with short-term interest costs. The agency finances road and rail projects."This vividly shows the risk of entering into interest-rate swap agreements," said Christopher Taylor, former executive director of the Municipal Securities Rulemaking Board in Alexandria, Va. "The world's got to see what stupidity even the sophisticated investors like the transportation fund can get into."
Yikes. New Jersey has paid out more than $11 million since the bonds were redeemed, according to Bloomberg, noting that governor Jon Corzine, formerly the chairman of Goldman, was a U.S. senator when the state struck the agreement.Local politicians are already squawking. Republican state senator Joe Kyrillos issued a statement demanding that Corzine, a Democrat, investigate similar transactions involving New Jersey authorities, which Kyrillos said amount to more than $4 billion.
"The governor has said he is open to hiking the gas tax to raise money to pay for vital transportation projects," Kyrillos said. "No gas tax should be on the table until we find out if we can get our highway and mass transit money back from this failed transaction."
New Jersey's explanation is that it tried, but failed, to replace the auction-rate bonds with variable-rate debt in 2008. The state's Office of Public Finance also said Bloomberg is being unfair, saying the article's calculation of the costs to taxpayers doesn't account for the full 16-year term of the agreement with Goldman. In a previous report, the office also said New Jersey saved nearly $10 million from 2003 to 2008 by issuing auction-rate, rather than fixed-cost, bonds.
The market for auction-rate securities, which are typically issued by municipalities to finance local construction and other development projects, seized up last year during the credit crisis.