New Jersey’s Local Finance Board approved an initiative Wednesday to create a new utility bonding authority for the state’s largest city, as Newark Mayor Cory Booker said the agency was needed to avoid tax hikes of 35%.

The proposed Municipal Utilities Authority would sell $600 million of debt to help finance an up-front lease payment to the city of $100 million, additional yearly payments, and capital improvements to the water system.

Newark’s fiscal 2010 began Jan. 1 and its budget includes a $70 million gap the mayor anticipates filling with the $100 million initial lease payment from the MUA. The remaining $30 million would help balance the fiscal 2011 budget. The proposed authority needs to issue the bonds by December for the city to receive those revenues by the end of fiscal 2010.

Newark is not looking to be active in the marketplace as it scales back its spending. Instead of issuing more city debt, Booker would like the MUA to sell bonds with water revenue repaying the debt.

“Creating an authority creates independent bonding ability,” Booker said in Newark during a press conference ­Wednesday.

Creating a new bonding authority would give the city some financial flexibility as it absorbs decreases in state aid and fewer contract payments from the Port Authority of New York and New Jersey. Overall, Booker is looking to reduce Newark’s operating costs by 20% to 25% to tackle structural deficits and meet growing retirement and health care costs.

Moody’s Investors Service rates Newark’s $500 million of outstanding debt an underlying A2 with a negative outlook.

“One of the key reasons to do this is because the city cannot go out for new bond issuances, given our capacity right now,” Booker said, noting that the MUA would issue about $600 million of bonds, based on existing water revenue.

The mayor stressed that the MUA could operate and manage the water system more efficiently than the city and potentially capture additional revenue through better collections and operational savings. The proposed $600 million of borrowing would update the system’s infrastructure and generate more jobs, Booker said.

The initiative would move about 122 employees off the city’s books. Booker said those cost savings would be “tremendous” for the city, but he did not have an estimate for the exact amount that would be saved.

While the state gave its approval Wednesday, Newark’s City Council has yet to weigh in on the initiative. If the nine-member panel approves the MUA, the council could then set to work on a franchise agreement detailing the authority’s powers, addressing future rate changes, and outlining its relationship with and commitments to the city. The council would also appoint the MUA board members.

Booker’s current timeline calls for the proposed authority to hold its first meeting Aug. 2 and the City Council to have a franchise agreement in place by the middle of August. Meeting those deadlines would enable the city to present that contract to the state’s Local Finance Board on Aug. 18.

Some council members have questioned placing the city’s water system in the hands of a new authority, but Booker said Newark would have to look to its tax base to help balance the $550 million fiscal 2010 budget without the MUA.

One-shot revenues now account for $180 million of that spending plan, including the $70 million from the anticipated MUA lease payment. The fiscal 2010 budget also includes roughly 600 non-uniform layoffs. Booker is urging police and firefighter unions to make concessions to avoid potential uniform layoffs.

“To me there is no option,” Booker said. “We must pass the MUA. I will fight to the final hour not to see a 30% to 40% municipal-portion tax increase. That is an unacceptable option and will have a cataclysmic effect on homeowners and families all around our city.”

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