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New Jersey uses bond to shave pension costs

Issuer: State of New Jersey

Amount: $2.75 billion

Issue type: Global bond

Launched: June 25

Lead manager: Merrill Lynch

US state governments that are worried about their unfunded pension liabilities and unwilling to risk being kicked out of office by raising taxes to pay for them have found a solution: borrow the money at today's low rates and let future administrations worry about any problems that crop up. After all, that's not unlike the position of today's state leaders, who inherited the cost of generous retirement plans voted in during the 1960s and 1970s.

Government officials like to say they are saving money by borrowing at current low interest rates to invest for tomorrow's pensioners. New Jersey's $2.75 billion global bond, issued last month, is the largest offering so far. That will be topped by a forthcoming $3 billion to $4 billion issue lead-managed by Goldman Sachs for the state of Michigan. The first such deal was launched by the state of New York last year, for $770 million.

Some aspects of the financing appear to improve on the status quo. Matthew McDermott, New Jersey's state treasurer, says the state estimates that it will save about $47 billion by shortening the terms of the payments it is required to make.

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