Gas tax formula supports New Jersey transportation bond deal

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Wednesday's $1.56 billion New Jersey Transportation Trust Fund Authority revenue bond pricing will be buoyed by a higher gas tax rate that took effect Monday.

Citi will price the Series 2018A transportation system bonds, which will refund outstanding debt.

The deal arrives after New Jersey’s gas tax increased by 4.3 cents per gallon on Oct. 1 in a move driven by a formula set up in 2016 transportation legislation.

The formula called for the tax increase because of lower-than projected fuel consumption levels during last two years to support the trust fund, according to state officials. The late 2016 agreement between former Gov. Chris Christie and state lawmakers as part of a $16 billion eight-year trust fund reauthorization raised the gas tax by 23 cents per gallon.

“Although debt service payments require annual legislative appropriation, the underlying tax revenue including [Monday’s] 4.3 cent per gallon gas tax increase of the Transportation Trust Fund is substantial,” said Janney Capital Markets municipal analyst Alan Schankel. “The essentiality of the state’s transportation network mitigates appropriation risk.”

The NJTTA deal is rated Baa1 by Moody’s Investors Service, BBB-plus by S&P Global Ratings and A-minus by Fitch Ratings. Moody’s analyst Baye Larsen noted in a Sept. 20 report that the 2016 gas tax increase led to the trust fund receiving $800 million more in total dedicated revenues for the 2018 fiscal year compared to 2016. Of the $2 billion collected in 2018, $1.3 billion was appropriated for debt service payments.

Monday’s gas tax increase up to 41.4 cents per gallon marks the second in three years for New Jersey following a 28-year stretch without a hike. The Garden State’s gas tax is now among the highest in the nation, but still lower than the neighboring states of New York (45.8 cents per gallon) and Pennsylvania (58.7 cents), according to the Tax Foundation.

“I believe the New Jersey Trust Fund Authority deal will be well received this week,” said Schankel. “New Jersey spreads in general have tightened in recent weeks which should be reflected in this issue’s pricing.”

McCarter & English, LLP is bond counsel on the deal.

Municipal Markets Analytics analyst Lisa Washburn said the NJTTA deal should be attractive to investors largely because of a lack of New Jersey paper recently.

She noted that while New Jersey faces deep credit challenges, the constitutional dedication of the gas tax for transportation purposes is a positive along with a new health care benefits agreement that will yield a projected $496 million of savings combined in 2019 and 2020.

“I suspect the NJTTA transaction will do fine and see good demand, notwithstanding the fiscal troubles at the state,” said Washburn.

New Jersey has the second lowest general obligation bond rating among U.S. states stemming largely from mounting pension liabilities and structural budget challenges.

The state’s GO debt is rated A3 by Moody’s, A-minus by S&P Global Ratings and A by Fitch Ratings and Kroll Bond Rating Agency.

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Primary bond market Transportation industry Gasoline tax New Jersey Transportation Trust Fund Authority State of New Jersey New Jersey