Gov. Jon Corzine last month unveiled a plan to restructure $32 billion of New Jersey's debt utilizing a technique previously reserved for the private sector that requires officials to give up some long-term control over toll levels in exchange for the fiscal resources to fund the state's transportation infrastructure for 75 years.
Corzine last week sat down with The Bond Buyer to talk about his proposal and future plans for New Jersey, including his fiscal 2009 budget - to be released on Feb. 26.
The debt-restructuring initiative involves the state entering into a concession agreement that will enable a public entity to back debt with a predictable, growing revenue stream from the state's toll roads. Under his asset monetization plan, the state would form a quasi-independant public benefit corporation to enter into a concession agreement with New Jersey to oversee toll roads and implement toll increases under a set, predictable schedule. Any surplus revenue from the tolls, after debt service and operating costs, would revert to the state for transportation infrastructure needs.
Other roadway concession agreements, such as those executed for the Indiana Tollroad and Chicago Skyway, involved private concessionaires paying the governments an up-front payment, in exchange for the right to oversee the roadways, increase tolls, and collect revenues, with any profits to be kept by the private entities.
"We looked at what some of the other states had done and said, 'What are some of the problems with those?' and - if I've got it right - in both Indiana and Chicago, the private vendors refinanced their transactions in the first year, took out all the capital they had with a return," Corzine said. "I don't think doing that kind of transaction for the state of New Jersey would be a good idea."
Macquarie Infrastructure Group of Australia and Cintra Concesiones de Infraestructuras de Transporte SA of Spain formed a partnership and now operate and maintain both the Indiana Tollroad and the Chicago Skyway. Indiana received $3.8 billion in its 75-year lease agreement while Chicago garnered $1.83 billion in its 99-year lease agreement.
In contrast, Corzine's administration wants to retain ownership of revenue generated from the toll roads. Beginning in the fall of 2006, state officials began working with UBS Securities LLC to carve out a concession agreement plan for the Garden State, one that would allow the state to keep future toll revenues but also remove the process of increasing tolls from the political arena.
"UBS did a great job of helping us look through our options," Corzine said. "Our principles were very clear. We would like to have a non-state-managed, non-for-profit, stand-alone organization be able to run the company with private sector efficiencies and sense of mission without having the benefits or the rate of return go to anybody other than the people who actually own the property, and that is the people of the state of New Jersey, and that's what we're doing."
Under the plan, the concession agreement would require the PBC, and not the administration or the Legislature, to raise tolls on the New Jersey Turnpike, the Garden State Parkway, and the Atlantic City Expressway by a maximum of 50% beginning in 2010 and following every four years thereafter through 2022.
After 2022, the corporation would have the authority to increase tolls every four years based on the consumer price index. New tolls could also be implemented on Route 440, which connects Staten Island to the turnpike and the parkway.
Corzine stressed the debt restructuring proposals also call for a change in the way state officials craft borrowing initiatives and annual budgets. Those new strategies include freezing spending in the fiscal 2009 budget at current levels, limiting future budget increases to future revenue growth, and constitutionally requiring that all future borrowing must have an identifiable revenue stream or obtain voter approval.
"Those three elements change the basic financing patterns that have gone on for decades in New Jersey, where we have seen revenues fall far behind trend expenditures," Corzine said. "We've seen borrowing grow at about a 13% compounded annual rate since 1990. We now have one of the highest debt loads per capita in the country and my objective is to both reduce the debt significantly by at least 50% and to create resources that will allow us to invest in our future infrastructure needs appropriate to transportation needs."
New funds could help New Jersey, as the state has one of the highest per-capita debt ratios in the nation, and debt service payments currently account for 7% of the state's operating budget. Along with the $32 billion of outstanding debt, New Jersey has an unfunded pension obligation of $25 billion and an unfunded other post-employment benefits liability of $68.7 billion.
In addition, the Transportation Trust Fund Authority, the state's transportation financing arm, will run out of funds in 2011, leaving the state in need of figuring out how it will finance future transportation projects, including developments the state already committed itself to, such as the Trans-Hudson Express rail-tunnel project, a $7.5 billion passenger rail tunnel that will run from Newark to Pennsylvania Station in midtown Manhattan.
Corzine has dubbed his proposal a debt and fiscal restructuring plan to help address those stresses.
"We need to have some kind of predictability to how we're going to deal with basic infrastructure investment as we go forward," Corzine said. "And the second principle is that we needed to get enough paydown of debt that we get our debt load as a state back in order and that we have a greater ability to make these ongoing payments, to contracted obligations like pensions and post-retirement medical benefits, because our fiscal house is in order and the reduction of the debt service should allow us to do that more comfortably then we would do otherwise. If we pay off debt, then we don't have to pay principal and interest, so we ought to be paying more comfortably our obligations for pensions and post-retirement medical benefits."
Corzine's plan could allow the state to pay down $6.9 billion to $11.9 billion of appropriation debt, along with $1.35 billion of Garden State Preservation Trust debt. He said his administration has not yet determined which bonds would be defeased, but he named the state's 1997 pension sale as one likely candidate. The state had roughly $2.64 billion of that $2.8 billion deal outstanding, as of June 30, 2007.
"You'll optimize those things that have the highest debt service that refunding or defeasance is the most attractive so that you get the biggest bang for your buck in reducing debt service," the governor said. "I haven't picked out the specific ones. I can tell you that it's quite clear that the pension bond issue of 1997 is one of the more heavy loads that we carry and it was structured with a back-loaded payment schedule, so we will end up having higher interest and principal costs in its final five years than what we had when it was first issued, and so it's a bigger problem than some of our other debt. If you had a level pay-down stream at low interest rates, they'd probably be the last thing that we'd go to. Things that had balloon payments or they were issued in higher interest rate environments, we have to take into consideration whether we get approval from the [Internal Revenue Service] for refunding some of the other issues."
Once legislation creating the PBC is in place, the corporation will officially file for tax-exempt status. Skadden, Arps, Slate, Meagher & Flom LLP and Hawkins Delafield & Wood LLP are advising the state on legal issues regarding the debt restructuring proposal, including the tax-exempt status of the PBC.
Officials expect the debt restructuring plan could generate $1 billion of savings in fiscal 2009 through the reduction of debt service payments. Overall, the administration is looking for $2 billion to $2.5 billion of cuts to help freeze spending at fiscal 2008 levels while also taking on additional operating costs. Corzine estimated that health care costs for the state could increase by $900 million next year, and last month he signed a school funding formula that gives school districts an additional $530 million.
"It's going to be very hard," Corzine said when talking about the fiscal 2009 budget. "We're going to end up cutting things that are in the budget of the fiscal 2008 budget to allow us to fund those increases in health care costs and also, by the way, increasing in spending on education that we felt that we would be mandated by the courts to provide under the so-called Abbott ruling, which requires parity funding for urban schools."
Corzine said he hopes the measure can pass through the Legislature by mid-March. His administration yesterday filed legislation for the debt restructuring plan. To date, the state has spent $7.2 million crafting the proposal.
"We need to have somekind of predictability to how we're going to deal with basic infrastructure investment," says Gov. Jon Corzine
