N.J. Board OKs Lease-Back Plan Between Newark, Agency

New Jersey’s Local Finance Board Wednesday approved a lease-back bonding plan between Newark and the Essex County Improvement Authority that will help the state’s largest city fill an $83 million deficit in the current-year budget.

Jim Paganelli, the authority’s executive director, said he anticipates releasing Thursday or Friday a request for proposals for underwriters for the bond deal. Acacia Financial Group is the financial adviser working on the lease-back borrowing plan. The authority anticipates issuing the bonds in late November.

The Local Finance Board, which is within the state’s Department of Community Affairs, reviews all municipal budgets in New Jersey along with debt refinancings and non-general obligation bond transactions.

The real estate lease-back arrangement involves the Improvement Authority issuing up to $89 million of tax-exempt and taxable bonds and using those proceeds to buy nearly 21 properties from Newark. The city would then lease those assets from the authority, with lease payments paying down the bonds.

The agreement also provides for $15 million of capital improvements to the 21 buildings, according to Newark Municipal Council documents.

The Essex County Board of Chosen Freeholders is set to weigh in on the borrowing plan on Oct. 21, Paganelli said. Newark’s Municipal Council passed the lease-back initiative at its Oct. 6 meeting, but still needs to sign off on its fiscal 2010 budget plan.

The authority is set to hold a final vote on the bond transaction in the second week of November. Final approval from the agency is the last authorization the bonds require before heading to market, Paganelli said.

Newark officials aim to fill the $83 million fiscal 2010 budget gap with about $40 million of bond proceeds from the lease-back bond deal, a 16% property-tax hike, spending cuts, and employee layoffs of about 850. In addition, the budget plan includes $8.6 million from a possible sale of a city-owned parking garage.

The Municipal Council gave its initial approval of those initiatives at its Oct. 6 meeting, including the property tax increase.

Newark’s fiscal 2010 budget was not on the LFB’s agenda for yesterday’s meeting. It is not clear if that spending plan and its 16% property-tax increase would require board approval, as the lease-back plan will help balance the budget.

The council will hold a public hearing today on the fiscal 2010 budget. Depending on the outcome of the public hearing, the council could vote on the fiscal 2010 spending plan following the hearing, according to Robert Marasco, the council’s city clerk.

Newark doesn’t have much time to waste. It needs to mail out fourth-quarter property tax bills in early November. Moody’s Investors Service in mid-August placed the city on review for possible downgrade. The agency noted that Newark had a very short time frame in which to balance the fiscal 2010 budget.

Moody’s rates Newark’s $500 million of outstanding bonds A2 with a negative outlook. Standard & Poor’s and Fitch Ratings do not rate Newark.

Paganelli said that the lease-back borrowing plan helps Newark with its immediate fiscal challenges and also generates fees for the improvement authority.

“It will have to get sized-up, but ordinarily we do 25 basis points on the deal and then 10 basis points on declining principal,” Paganelli said.

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