(Bloomberg) -- New Jersey taxpayers are sending almost $1 million a month to a partnership run by Goldman Sachs Group Inc. for protection against rising interest costs on bonds that the state redeemed more than a year ago. If it wasn't something to do with government I'd call it a gouge. Lucky for Noo Joisey they're gonna elect Corzine and he'll clean this sort of mess right up. A pity they had that other guy in for the past however many years.
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, Virginia. "The world's got to see what stupidity even the sophisticated investors like the transportation fund can get into."
While New Jersey replaced the debt with fixed-rate securities in 2008 after the $330 billion auction-rate bond market froze, the swap -- in which two parties typically exchange fixed payments for ones based on floating interest rates -- isn't scheduled to expire until 2019.
The state paid $940,000 under the agreement last month and a total of $11.4 million since the auction-rate bonds were redeemed. The expenditures come as the fund reaches its borrowing limit and Governor Jon Corzine, Goldman's former chairman who was a U.S. senator when the contract was signed, seeks $400 million in budget reductions as tax receipts fall.
Bond's Life
"The state has made it clear that true interest costs are measured over the life of bonds," the New Jersey Treasurer's office said in an e-mailed statement from spokesman Tom Vincz. "As this swap is applied as it was intended to be applied, with TTFA variable-rate bonds, true interests costs are projected to be below the average true interest costs for TTFA bonds," the statement said, referring to the Transportation Trust Fund Authority by its acronym.
"Unfortunately, Bloomberg misleadingly measured these costs over a brief window in time, which captured only the influences of the worst credit conditions in U.S. history."