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Corzine's Plan Could Allow $37B of Toll Debt

New Jersey Gov. Jon Corzine yesterday said future tolls on existing and newly tolled state roads could back roughly $37 billion of tax-exempt and taxable bonds this year, if the Legislature and the Internal Revenue Service approve his plan to restructure the state’s outstanding debt. Corzine presented the long-awaited plan in Trenton yesterday, proposing a 50% toll increase on the New Jersey Turnpike in 2010 and increasing every four years thereafter and implementing new tolls on Route 44, which connects Staten Island with the Turnpike and the Garden State Parkway. The nearly $37 billion of bond proceeds would then defease $11.9 billion of state-backed debt, another $9.2 billion of Transportation Trust Fund Authority debt, $5.7 billion of combined outstanding Turnpike, Parkway, and Atlantic City Expressway debt, and $1.35 billion of Garden State Preservation Trust debt, while creating a $4 billion reserve for capital expenditures by a public benefit corporation that would be created to enter into a concession agreement with the New Jersey Turnpike Authority and the South Jersey Transportation Authority. The PBC would operate and maintain the turnpike, the parkway, and the expressway. In addition to the plan outlined above, the massive borrowing would also create a $4 billion debt-service reserve for the corporation. Paying off the state debts and funding the PBC would help New Jersey address its $3 billion structural deficit and fund the current Transportation Trust Fund Authority for 75 years, said Bradley Abelow, Corzine’s chief of staff. New Jersey has $30 billion of outstanding debt. Debt service costs account for nearly 7% of the state operating budget and officials expect debt service payments to increase to $3.4 billion from $2.7 billion over the next five years. In the proposal, Turnpike tolls would increase by 50%, at the most, in 2010, 2014, 2018, and 2022, with that percentage compounding over time. In addition, the corporation would have the authority to adjust tolls every four years based on the consumer price index. For more than a year, the administration has been working with UBS Securities LLC on how best the government can generate more revenue through its assets, in particular, toll roads. Corzine also announced he will introduce a fiscal 2009 budget next month that freezes spending at the current, fiscal 2008 level, and push legislation that would restrict future operating budgets so that spending does not exceed recurring revenues. The new financing plan could help the state craft its fiscal 2009 budget by possibly reducing the $3 billion structural deficit by $1 billion through the reduction of debt service payments. Yet, Corzine urged lawmakers to act quickly on the measure. “It is my expectation that over the next two months we can review and debate the details, but we must come to judgment by the middle of March so that we can go forward responsibly in the new fiscal year.” Corzine told the Legislature in the state of the state address he delivered in the statehouse. To execute the up to $37 billion financing, the state would form a public benefit corporation. The PBC’s structure would authorize it to raise tolls without political influence, a provision administration officials said could give added security to the bonds and peak investor interest. In addition, a proposed public interest corporation — what officials are calling a “shareholder equivalent” would reside within the PBC and would choose PBC board members, rather than giving that power to the governor or the legislature. The governor, however, would form the PIC. Before a PBC could enter the bond market, Corzine’s plan, including the toll increases, needs legislative approval. Officials say potential investors in PBC bonds would vary as the bonds could include tax-exempt and taxable debt and bank loans that may be converted into tax-exempt debt at a later date. “Those bonds in whichever market they are will be marketed to the broadest possible audience,” said Nancy Feldman, the state’s finance director. “If they happen to be in another country, then good for us.” Carol Rein, managing director at UBS, said she thinks the market will respond well to bonds being issued by an entity insulated from the political process. “I think that the market has a sense that the independent nature of the concession agreement and this board and the management is important to how much they’re willing to loan,” she said. Officials are considering all financing mechanisms, including long-term and short-term debt, fixed- and variable-rate bonds, zero-coupon debt, and other structures. In addition, if the IRS does not allow the corporation to issue tax-exempt debt, Feldman said the PBC would then sell taxable debt. The corporation could sell $32.6 billion to $37 billion of debt, depending upon whether the Legislature decreases the toll-hike schedule and by how much, and market conditions once the PBC sets to price the bonds. The corporation would sell the debt six to nine months after receiving legislative approval, officials said. After the speech, some lawmakers questioned the fiscal responsibility of Corzine’s plan, including the proposal to defease outstanding debt with another debt that may or may not have longer maturities than the original debt. The administration has yet to detail how long maturities would be. In addition, legislators are concerned about using the savings generated by decreasing annual debt service payments as a way to continue spending when the state should be scaling back.

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