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Should NJ Deliver In-Depth Analysis of the Affordability of Its Debt?

A comprehensive debt-affordability analysis can be used as a tool to weigh future bond issues and the costs of servicing that debt

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Every year the state government produces a lengthy summary of just how much money New Jersey owes its bondholders. But a new report on the issue of government borrowing suggests New Jersey should consider going a step further by adding an in-depth analysis of the affordability of its debt.

The report released last week by The Pew Charitable Trusts found 27 states are currently producing a debt-affordability analysis, something that lawmakers in those states can then use as a tool as they weigh future bond issues and the costs of servicing the debt. And nine states were highlighted by Pew for doing the strongest analyses.

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The Pew report also made a series of recommendations for a group of states that includes New Jersey that do not currently compile such an in-depth analysis. The recommendations include calling for a forward-looking assessment, one that takes into account the impact of multiyear debt in the context of a state’s revenues, and a deep analysis of upcoming capital needs and remaining debt capacity.

“As state officials face competing pressures to save or spend, grasping the nuances of debt management is becoming ever more important,” said Mary Murphy, director of Pew’s state and local fiscal health project.

A useful tool

“This report is intended to be a helpful tool for policymakers to manage debt and make informed choices about state finances over the long term,” Murphy said.

The recommendations could prompt New Jersey lawmakers to take a new look at the issue of debt affordability after a prior effort to require a long-term analysis here was rejected several years ago by Gov. Chris Christie.

The Pew report also comes out as several New Jersey lawmakers are in the midst of suing the Christie administration over a plan to renovate the State House in Trenton with $300 million in long-term bonds that were issued last month through the state Economic Development Authority without approval from the Legislature or from voters. The next court hearing in that case is scheduled for later this week, with one of the issues in contention being what the true cost of the project will be as the long-term debt is paid off with interest.

Among the most indebted

New Jersey has for years been among the nation’s most indebted states, something that’s been regularly noted as a factor in the series of credit-rating downgrades that have been issued in recent years by major Wall Street rating agencies. The latest state-by-state rankings listed New Jersey third among U.S. states with the highest gross tax-supported debt, and fourth among states with the highest per-capita debt.

Under current New Jersey law, the state Department of Treasury is required to produce an annual debt report that accounts for all of the state’s long-term obligations, including debt taken on through the issuance of bonds as well as nonbonded obligations like the funding of public-employee pension checks and retiree healthcare coverage.

The latest state debt report, issued in March, showed New Jersey’s total bonded debt slightly decreased as of the end of the 2016 fiscal year, to $42.7 billion. But because the report was issued more than eight months after the 2016 fiscal year closed, the latest debt assessment didn’t include roughly $3.5 billion in new borrowing that has occurred since the year ended.

New Jersey was credited in the Pew report for requiring the annual debt summary, but it was placed in a group of 23 states that do not take the evaluation a step further by also performing a debt-affordability analysis. And only nine states are currently producing the type of thorough analysis that Pew is recommending. They are Florida, Georgia, Maryland, Massachusetts, New Hampshire, North Carolina, Oregon, Texas, and Virginia.

Recommended by the report

The report’s recommendations include putting the debt data in the context of the state’s broader finances and including a portrayal of annual debt service as a share of annual revenues. Other recommendations include making long-term projections that take into account expected upcoming capital projects and ongoing debt-service obligations so lawmakers can fully understand “future claims on revenue.”

The report also recommends that the state compares its debt to a set of peers, and that the evaluation be conducted by an agency with a commitment to objective analysis so the report is widely available and taken seriously by policymakers.

“Used carefully and methodically, debt can be a powerful instrument that state and local governments can use to repair vital infrastructure, improve quality of life, and drive economic growth,” Murphy said. “These affordability studies provide crucial data that help officials better understand and manage their state’s debt.”

New Jersey lawmakers made an effort to incorporate a long-term debt-affordability analysis in the drafting of the annual debt report with a 2014 bill, and no lawmaker in either the Assembly or the Senate voted against the bill as it moved through the Legislature that year. The legislation called for 10-year projections of existing debt service and anticipated revenues, an analysis of estimated borrowing capacity, and a detailed comparison with 10 peer states.

Absolute veto

But Christie rejected the measure using the absolute veto, saying the 10-year projections would generate “a speculative report that would be of little value in making future debt determinations.”

An override attempt also failed as Republicans in the Assembly, where the bill originated, changed their votes to side with the governor, who’s never had one of his legislative vetoes successful overridden in both houses since taking office in early 2010.

A new version of the debt-analysis bill has since been reintroduced, and last year it once again was passed by the Assembly. An identical Senate version, however, has yet to be taken up by the Senate Budget and Appropriations Committee.

Asked for comment on the Pew report on Friday, Treasury spokesman Willem Rijksen said the state’s current annual debt report “provides a sufficient summary and analysis of the state’s debt.”

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