Christie Plugging Transportation Trust Fund Hole With Bond Premiums One-Shot

Mark J. Magyar | March 4, 2013 | Budget
Borrowing for TTF under Christie will be at record high, pay-as-you-go financing at all-time low

Gov. Chris Christie is plugging a hole in next year’s Transportation Trust Fund budget with a one-shot cash infusion made up of $250 million in upfront bond premiums generated during the last two TTF bond sales. But the cost of the bond premiums will be paid off by taxpayers in higher-interest payments over the next 31 years.

“We have $250 million in bond premiums in hand because we were able to offer attractive interest rates on our previous bond sales,” said Treasurer Andrew Sidamon-Eristoff. “As a result, we will be able to fully fund the Transportation Trust Fund without borrowing any more money and without pay-as-you-go financing.”

Unlike conventional par bonds — which sell at face value — investors pay above face value for premium bonds because their overpayment is repaid in higher interest rates over the life of the bond. By offering “attractive interest rates” of 6.56 percent for $600 million in TTF bonds sold in May 2011 and 5.0 percent to 5.5 percent for $1.3 billion in bonds sold in December 2011, the state was able to take in $250 million more than the $1.9 billion face value of the two bond offerings.

Martin E. Robins, director emeritus of Rutgers University’s Alan M. Voorhees Transportation Center, sharply criticized the Christie administration’s premium financing and the elimination of pay-as-you-go financing for the second year in a row.

“Christie said he was against increasing bonded indebtedness and wanted to do more pay-as-you-go,” Robins pointed out. “And now, because he needs money for his budget, he is increasing bonded indebtedness. Bond premiums are really additional debt because, in the long term, the debt service is higher. Taxpayers pay a higher price in higher interest rates.”

Treasury Department spokesman William Quinn said the $250 million in bond premiums, along with a decision to move up construction of highway, bridge, and mass transit projects that are eligible for a higher percentage of federal funding in fiscal year 2014, enables the state to forgo the $375 million in pay-as-you-go financing promised by Christie in January 2011, when he unveiled his five-year plan for the renewal of the Transportation Trust Fund.

That, in turn, lets Christie once again take at least $295 million in New Jersey Turnpike Authority toll revenues earmarked to cover the bulk of the pay-as-you-go financing in the Transportation Trust Fund to help balance the FY14 budget, as he did in FY13.

“If you compare where we are today to where Christie said we would be, there’s a giant differential in the amount of bonded indebtedness and pay-as-you-go financing he promised,” Robins said. “We were worried he would eliminate pay-as-you-go as soon as he had budget problems. He’s at zero now, and there’s no way he gets to the $605 million in pay-as-you-go financing he promised by 2016. It’s borrow-and-spend, and it’s more borrowing than the governor promised.”

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Christie already has authorization to issue $1.247 billion in additional TTF bonds in the current fiscal year — up from the $986 million he said he would borrow in his original 2011 plan — and is proposing to issue $850 million more in FY14, which would bring the total borrowed for transportation capital projects in his four budgets to $5.012 billion. That figure does not include the $250 million bond premium from the 2011 TTF bond sales.

Reaching New Heights

Christie’s total is higher than the $3.867 billion in TTF borrowing by his predecessor, Democrat Jon Corzine, whom he criticized during his 2009 gubernatorial campaign, as well as the previous four-year high of $4.121 billion under Democratic Govs. Jim McGreevey and Richard Codey in their FY03 to FY06 budgets, according to Transportation Trust Fund Authority statistics.

To reduce the level of borrowing in the five-year, $8 billion TTF refinancing plan he laid out in January 2011, Christie tapped $1.5 billion in Port Authority revenue originally slated for the Access to the Region’s Core (ARC) rail tunnel project he cancelled. He also vowed to provide $1.4 billion in pay-as-you-go financing out of Turnpike toll revenue that also had been earmarked for ARC and general state revenues. The overall pay-as-you-go percentage would be 20 percent.

Christie made the first pay-as-you-go installment of $66 million in FY12, but cancelled the scheduled FY13 payment of $261 million and borrowed the money instead. Now, he has eliminated the $375 million in pay-as-you-go planned for FY14.

As a result, through the first four years of his administration and the first three years of his TTF refinancing plan, Christie’s percentage of pay-as-you-go financing is a paltry 2.5 percent — far lower than the 11.5 percent under Corzine, 19.4 percent under McGreevey and Codey, and 21.9 percent under Republicans Christine Todd Whitman and Donald DiFrancesco from FY95 to FY02.

Annual TTF debt service, which stood at $538.9 million in Codey’s FY2006 budget and $777.8 million in Corzine’s last budget, hit $995.4 million in Christie’s third budget and is projected to rise to $1.044 billion next year and remain at that level through 2023, according to the Transportation Trust Fund Authority. The cost of debt service would be higher if interest rates had not remained so low throughout the Christie years.

However, the state’s transportation debt will rise again starting in FY17 when it has to come up with another plan to renew the Transportation Trust Fund, presumably for another $8 billion over five years. If Christie is reelected governor in November, that decision would have to be made in early 2016 in the middle of Christie’s possible campaign for the Republican presidential nomination.

No New Taxes

Christie’s 2011 Transportation Trust Fund refinancing plan — and perhaps his 2010 cancellation of the ARC Tunnel project — were driven by his determination to keep his promise not to raise any New Jersey tax, including the state’s 14.5 cent per gallon gasoline tax, which is the third-lowest in the nation and far below New York State’s 43-cent tax and Pennsylvania’s 39-cent levy.

Christie also had to maintain full TTF funding at the previous $1.6 billion-a year-level to stay in the good graces of the state’s building trades unions, which he has steadfastly wooed while attacking the public employee unions. The Laborers Union, which backed Corzine in 2009, cited Christie’s continuation of full TTF funding in endorsing the Republican governor for reelection last month, and other building trades unions may follow.

Most states fund their transportation construction programs primarily through gasoline tax revenues, but by 2011, all of New Jersey’s gas tax, motor vehicle fees, and sales tax revenues dedicated to transportation were just enough to pay the debt service on past bond issues. Similar decisions by Christie’s predecessors to rely on debt rather than raise the gas tax or find another dedicated revenue source for the TTF resulted in similar outcomes.

Cancellation of the ARC Tunnel project, which required the state to give up $3 billion in federal funding — the largest federal transportation grant in the nation — freed up enough Port Authority and New Jersey Turnpike Authority funds originally earmarked for the $11 billion project to enable Christie to cover $3.2 billion of the $8 billion five-year cost of the Transportation Trust Fund for FY12-FY16.

But no such revenue windfall will be available in 2016, leaving Christie no option other than to increase borrowing again if he wants to avoid a tax hike. Further, over the past two years, Christie has had to divert $636 million in that pay-as-you-go money to cover other ongoing state budget problems.

“What they’re doing is stretching themselves into pretzels to maintain a $1.3 billion program [not including the $343 million to $376 million in Port Authority funding] and avoid having to raise any additional revenue,” Robins said. “So they’re bonding and bonding and bonding some more. And this is exactly what Christie said he deplored when he set out this program after killing ARC.”

Sidamon-Eristoff expressed satisfaction that the use of the $250 million bonding premium would enable the state to hold TTF borrowing in FY14 to the $850 million level promised in Christie’s January 2011 plan.

The $250 million bonding premium covers two-thirds of the $375 million in pay-as-you-go financing eliminated from the TTF budget, with the remaining $125 million presumably made up by shifting transportation construction priorities to maximize federal funding in FY14. Quinn said he did not have a list of which projects would be pushed forward or back as a result.

“They [the state Department of Transportation] have some flexibility in how they schedule the transportation projects they are going to work on in FY14, and they are planning to move forward the ones that are eligible for a higher share of federal funds,” Quinn said. “There will be more federally funded work in FY14 than originally planned, and we will adjust in future years to do more of the state projects.”
Together, the $250 million bonding premium and the shift to projects with a higher federal share “will allow them to hit the target of $1.6 billion in transportation capital funding and not go any higher than $850 million in bonds,” Quinn concluded. “We expect to stick at that number.”