Federal funding cuts, rising construction costs, policy changes and other challenges are straining some of the Northeast's largest issuers, panelists told the attendees at The Bond Buyer's National Outlook Conference Thursday. Some issuers are searching for new borrowing strategies to cope with the costs.
Kris Kolluri, who became president of NJ Transit and executive director of the New Jersey Turnpike Authority last week, told attendees he's inherited quite a few problems.
Tariffs, combined with the federal buy-American requirements, drive up the costs of purchasing buses, Kolluri said, and will probably force the agency to buy fewer than it needs. The most baffling part, Kolluri added, is the agency is paying the tariff-inflated prices with grants from the federal government.
"It is invisible to the public, but the net impact is still the same," Kolluri said. "The net impact shows up in delays, the net impact shows up in a reduction of the number of buses we get."
Kolluri was also the first CEO of the Gateway Development Commission, the $16 billion project to add to and replace parts of 100-year-old tunnels under the Hudson River.
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The Gateway Commission has filed a lawsuit for the remaining funds, as have the attorneys general of New York and New Jersey.
Kolluri offered a warning. "Anything we do to destabilize this project — take it off the books, as it were — one day will lead to a catastrophic failure of those tunnels. Mark my words."
He hopes the funding crisis will be resolved outside of court because a resolution through the courts will take longer.
Northeast issuers are grappling with a variety of fiscal problems from federal actions.
Massachusetts Deputy Treasurer for Debt Management, Sue Perez, said changes to the federal tax code are projected to create a $460 million shortfall in Massachusetts, spread over two years. Gov. Maura Healey recently filed a proposal to address the gap.
"If you have certainty, I think it's easier to react," Perez said. "It's the ever-changing policies and ever-changing surprises that are coming that are making it a little challenging."
Kimberly Mooers, Connecticut's assistant treasurer for debt management, said the state's fiscal guardrails and the reserves they built could help mitigate the federal government's changes.
In addition to federal challenges, issuers must manage crumbling infrastructure, rising prices and pressured state budgets.
Kolluri said the Turnpike Authority's revenue is treated like a "cash cow" by other New Jersey agencies. At the same time, its 20-year capital plan is "extraordinarily aspirational," and the projects within it are becoming increasingly expensive.
"Just for one project, it's $200 million. When you get to the next four or five, you're talking about billions of dollars of contributions. I can't support that internally," Kolluri said. "The infamous Newark Bay [bridge] extension project is now $10 billion. That's half the entire capital program."
Borrowing strategies will matter going forward, Kolluri said, because agencies will be looking to find any savings they can.
"The volatility in the tariff and trade world and supply chain world is actually putting a lot of pressure" on issuers, Kolluri said. "I look at this and say, 'Well, how do I, within the authority, imagine short-term borrowing could be an instrument that could help with costs?'"
The Turnpike Authority's outstanding debt is entirely long-term, Kolluri said. Adding short-term debt could help the authority meet more investor demand and achieve savings.
The revenue backing Connecticut's special tax obligation bonds is projected to start "dwindling" Mooers said, and the state hasn't yet decided what to do about it.
"Apparently toll is a four-letter word, literally and figuratively in the state of Connecticut. So we are looking at different mechanisms," Mooers said.
Connecticut doesn't have much variable-rate debt, Mooers said, which could be an outlet for savings for the STO bonds. She's also looking at longer-term STOs.
"Since day one, I've been a little bit shocked at how little variable rate debt the state has," Mooers said. There are policy reasons for this, she said, but she wants to explore whether variable-rate debt could be a possibility.
Massachusetts regularly solicits new ideas for its issuing strategy, Perez said, and always asks for ideas on short-term and variable rate issuing in its RFPs.
"At any point in time in Massachusetts we have about a billion dollars of refunding candidates, so we evaluate them with every bond that we're doing," Perez said. "There is some balancing that needs to be done with new issues, refunding," and staying within the debt cap. "So, we look for meaningful savings. For those in the audience who know me, you know I like double-digit [savings]."
Massachusetts plans its borrowing at regular intervals, Perez said, rather than trying to time the market.
New Jersey Transit doesn't issue debt, Kolluri said, but he wants to find new sources of financing.
The Gateway project received a historically large Railroad Rehabilitation and Improvement Financing loan from the Department of Transportation, Kolluri noted, and he wonders whether NJ Transit should be trying to access Transportation Infrastructure Finance and Innovation Act loans.
