Corzine Plan Raises Questions of Long-Term Financial Effects

While analysts say the municipal market could absorb $37.6 billion of potential tax-exempt and taxable bonds that would help New Jersey restructure its current debt, critics of Gov. Jon Corzine’s transportation finance plan question how the new debt would affect the state’s finances over the long term.

To help spearhead the democratic governor’s financial restructuring initiative, Corzine yesterday announced that former U.S. Rep. Bob Franks, a Republican, will serve as chairman of the governor’s campaign to sell within the next year nearly $38 billion of debt backed by future toll hikes.

Those proposed fare increases include a maximum 50% boost to tolls on the New Jersey Turnpike in 2010 and increasing every four years thereafter and implementing new tolls on Route 440, which connects Staten Island with the Turnpike and the Garden State Parkway.

For more than a year, the Corzine administration worked with UBS Securities LLC in crafting the restructuring proposal.

“You may ask how a fiscally conservative Republican like myself could find common ground with a liberal Democrat like Jon Corzine,” Franks said in a press release. “The answer is simply that the governor has broken with tradition in Trenton and declared that we have to transform the way we handle the state’s finances.”

That transformation includes using the roughly $38 billion of bond proceeds to defease $11.9 billion of state-backed debt, $9.2 billion of Transportation Trust Fund Authority debt, $5.7 billion of combined outstanding debt Turnpike, Parkway, and Atlantic City Expressway debt, and $1.35 billion of Garden State Preservation Trust debt. The proposal would also create a $4 billion reserve for capital expenditures by a public benefit corporation that the state would create to enter into a concession agreement with the New Jersey Turnpike Authority and the South Jersey Transportation Authority. Bond proceeds would also support a $4 billion debt-service reserve for the corporation.

The proposal will need to pass through the Legislature and receive approval from the Internal Revenue Service for the corporation to sell tax-exempt debt before the bonds enter the market. If the IRS does not grant the corporation tax-exempt borrowing power, the PBC will move forward with taxable bonds, Nancy Feldman, the state’s finance director, said on Tuesday during a briefing on the program.

Although the potential $38 billion of debt is sizable, municipal analysts said the market should be able to handle the bonds.

“I’m amazed at what the market can absorb,” said Dick Larkin, a municipal bond analyst at J.B. Hanauer & Co. “When California sold their $15 billion deficit deal back in 2004, I thought they were going to have a hard time swallowing that. They chewed that up and said, ‘Where’s more?’ Now, granted, $38 billion is still twice as much as that one, but the market has been pretty resilient in absorbing this type of stuff.”

Matt Fabian, managing director at Municipal Market Advisors, said there’s “great demand” for New Jersey bonds and that if the corporation enters a market with 5% yields on the long end and 4% yields on the short end, retail interest will peak even more.

“It’s a big-sale program obviously, but it should be manageable in the market and that probably could get done at prices not terribly far above where we are right now,” Fabian said.

While the market takes on the bonds, the proceeds from the sale could help New Jersey find $1 billion of savings through lower debt service payments to help address the state’s $3 billion structural deficit. By defeasing a combined $20 billion of state-backed debt and TTFA bonds, the proposal would cut New Jersey’s current outstanding debt of $31.3 billion to $11.25 billion, which would also decrease the state’s annual debt service costs. Officials pegged potential yearly annual debt service savings at $960 million from fiscal 2009 through fiscal 2018, $590 million from fiscal 2019 through fiscal 2028, and $70 million from fiscal 2029 through fiscal 2028.

Yet Assemblyman and chair of the General Assembly Transportation and Public Works Committee John Wisniewski, D-Middlesex, questioned the practice of using state toll roads to help fix state budgetary problems.

“I don’t agree in using a transportation asset to leverage the state budget,” he said. “People who use the transportation system should be paying tolls to enhance and maintain and augment that transportation system.”

In addition, Corzine’s proposal could push out maturities on existing debt as the new bonds may have longer maturities than the current bonds, an issue that Wisniewski and other lawmakers raised following the governor’s speech on Tuesday. In addition, Wisniewski rejects the governor’s proposal to have non-transportation-related debt become the responsibility of motorists and not the state as a whole.

“That’s the very opposite of what the governor’s policy should be,” Wisniewski said. “If we’ve incurred a debt for the people of the state of New Jersey, then the people of the state of New Jersey should equally share in that, not just a subset.”

Instead, Wisniewski proposes increasing the gas tax by 15 cents to 20 cents per gallon to generate more revenue that would support the TTFA after the program runs out of funds in 2011, although that plan would address funding for the TTFA and not tackle the state’s high debt burden overall.

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