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OLS: Even After Midyear Cuts, Christie's Still $526 Million Short

But Democratic Gov. Jim McGreevey, facing a major budget crisis in the regional recession that followed the attacks on the World Trade Center, decided in 2002 to “securitize” the tobacco money by setting up a Tobacco Settlement Financing Corp. The company then sold the future tobacco payments to private bondholders in order to create “the mother of all one-shots” -- a $1.557 billion payment in FY2003 and a $1.611 billion infusion in FY2004 that McGreevey used to balance those budgets.

In 2007, when the Tobacco Settlement Financing Corp. decided to refinance $3.62 billion in bonds, Democratic Gov. Jon Corzine, whose treasury was swimming in revenue before the Great Recession hit, reacquired 23.74 percent of the bonds, which subsequently produced payments of about $55 million a year to the state treasury.

Part of the 2007 bond sale was a series of capital appreciation bonds (better known as zero-coupon bonds) that were sold at deep discounts with the promise that they would pay their bondholders $1.28 billion in June 2041. Capital appreciation bonds “are known as a distinctly horrible means of public finance,” Sidamon-Eristoff said.

Because of the decline in tobacco revenue caused by a drop in smoking, “it was clear that if we did nothing, the bonds would go into default by 2041,” Sidamon-Eristoff said. “The bonds were not obligations of the state, but it was clear the state would be at least connected to it. It was incumbent on us not to suffer future governors or legislatures to be elevated into default.”

The bondholders included major players like the OppenheimerFund Inc., Goldman Sachs, and Columbia Management Investment Fund, and when the bondholders and Barclays Bank approached Sidamon-Eristoff, who by statute served as head of the Tobacco Settlement Financing Corp., the treasurer was ready to act.

“An arrangement was done between the treasurer, the corporation headed by the treasurer, and the bondholders . . . of these zero-coupon bonds which had really fallen to junk bond status,” Rosen explained. According to the deal, the state shored up the fiscal health of the bonds by giving up $406.7 million it would have been owed between FY2017 and FY2023 in exchange for an upfront cash infusion of $91.6 million this year and the promise of additional payments after 2041.

Barclays made $4 million to $5 million for handling the deal, the price of the bonds tripled in four days in early March after the deal was announced, and the zero-coupon bond ratings jumped from C+ junk bond status to A- investment grade.

Sidamon-Eristoff got a $91.7 million plug for his current year budget deficit, although he did not mention the $406.7 million price tag in lost revenue from FY17 to FY23 in his explanation of the deal.

Rosen did. The bottom line, he said, is that “In FY14, we get $91 million. In FY17 to FY23 or FY24, we don’t get $406 million we would otherwise have received. We could conceivably get $1 billion or $2 billion in the 2040s,” but that is not guaranteed and those dollars will be worth less than dollars today.

Sidamon-Eristoff said the refinancing made it more likely that the state would get revenues that would otherwise be paid to bondholders from 2041 to 2049. “We have 91-and-a-half million in our pocket now and got further net present value savings coming to us. Fiscally and from a debt management point of view, this was a no-brainer. I feel very strongly given the current environment we should look for savings wherever we can,” Sidamon-Eristoff said, referring to the state’s current budget problems.

Left unsaid was New Jersey Policy Perspective budget analyst David Rousseau’s observation that while Barclays, the large institutional bondholders, and Sidamon-Eristoff were big winners in the deal, those responsible for balancing New Jersey’s state budgets from FY17 to FY24 will lose $56 million to $67 million a year in revenue.

The first two budgets will still be the job of the Christie administration, but the responsibility for the four to five budgets that follow will fall upon his successor.

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