I was pleasantly surprised and gratified to see the U.S. Securities and Exchange Commission sue the State of New Jersey for fraudulently misrepresenting its financial health because of its failure to report on the status of its pension funding. According to the SEC, New Jersey had 79 separate bond offerings between 2001 and 2007, representing over $20 billion in tax-exempt bonds, on which it made false and misleading disclosures to investors and prospective investors.
I would hope this is a first step to getting government finances in order. Like many people with discretionary assets, my wife and I own tax- exempt bonds. We are deeply concerned about whether we are getting accurate and complete information about the state of finances in Connecticut, and in the few other states in which we have government bonds.
According to an editorial in the Friday, August 20, 2010, Wall Street Journal, entitled “The SEC’s Jersey Score” Congressman Barney Frank believes that the credit-rating agencies should apply different standards to government securities issuers because they rarely default. He is wrong. They do default, and California defaulted last year by paying in IOU’s instead of cash for a period of time. During the Great Depression, many units of government were essentially insolvent.
The issue is much bigger than whether states and localities pay their bondholders on time. They are cutting back vital services to their citizens and punitively raising taxes and user fees and reducing their base of employees in clumsy and dysfunctional ways to meet their payment obligations. They are essentially becoming nothing more than conduits for payments from all the citizens to a much smaller group of militant, well-organized state and local employees and retirees who are receiving excessive benefits.
This is not an income transfer from the rich to the poor, but from all the citizens, rich, middle class, and poor, to a small group of citizens who are taking a greater share of the citizens’ wealth than is justified by the type and duration of services they perform for the state and its citizens. The reason this income transfer system has arisen and persists is because it is the path of least resistance for government officials. More state and local employees, particularly as union members, means more votes and more campaign contributions, and a greater chance of being re-elected.
Only time will tell whether this lawsuit is an aberration or whether it scares risk-averse public officials into doing the right things in terms of disclosing the true story regarding the financial health of the governmental entities they lead.