New Jersey has once again turned to short-term borrowing to make sure the state has enough cash on hand to cover its bills in the early months of the fiscal year, when revenue collections are typically slow, Department of Treasury officials confirmed yesterday.
But at a little less than $2 billion, this year’s short-term drawdown is measurably smaller than what the state has needed during the last three fiscal years, another sign New Jersey’s finances could be improving this year after several difficult budgets.
That fiscal outlook bodes well for Gov. Chris Christie, a second-term Republican now running running for the presidential nomination in a crowded GOP primary field. But it could also put more pressure on Christie to deposit money sooner than planned into the state’s chronically underfunded public-employee pension system.
A bill sponsored by Sen. Robert Gordon (D-Bergen) that’s currently on Christie’s desk calls for the administration to make quarterly pension contributions instead of following tradition and waiting until the fiscal year closes at the end of June to make a full payment.
Short-term borrowing has become routine for the state over the last two decades. That’s because although the fiscal year begins July 1, much of the revenue – such as sales taxes from the holiday shopping season and income taxes in April — comes in during the later months of the fiscal year.
Since the state still has bills to cover early on in the fiscal year, it borrows funds at low interest on a short-term basis to make sure those bills are paid.
This year, the state Department of the Treasury is again using a type of short-term loan known as a “cash-flow facility,” secured from investment bank RBC Capital Markets, said department spokesman Joseph Perone. Treasury drew down $1.9 billion last month, he said. The interest on the borrowing is based on the London Interbank Offered Rate, a commonly used benchmark for short-term loans, plus .40 percent per year, Perone said.
At $1.9 billion, the short-term borrowing for this fiscal year is less than the $2.6 billion that Treasury officials said has been borrowed at the start of each of the last three fiscal years. And the lower amount continues a positive trend that started earlier in the year when Treasury officials reported tax collections for the 2015 fiscal year had come in roughly $200 million above their latest projections.
The unexpected windfall was used when the 2015 fiscal year ended on June 30 to boost the contribution into the public-employee pension system to $893 million. The state was also able to begin the current fiscal year with a $700 million surplus account, about double the amount that was originally projected when Christie proposed his $33.8 billion spending plan back in February.
But as the state’s finances improve, Christie faces more pressure from Democrats, who control the Legislature, and public-worker unions to get more cash into the pension system, which is roughly $40 billion in debt.
The pension system, which covers an estimated 770,000 current and retired workers, has been a source of controversy for the better part of the last year after Christie veered off a schedule of state contributions that were pledged in reforms he signed into law in 2011.
[related]The pension cuts came last year in response to a roughly $1 billion budget shortfall, and public-worker unions sued to block them. But the state Supreme Court in June upheld the administration’s right to underfund the pension system, saying only voters can authorize such long-term obligations.
Lawmakers, also in June, sent Christie legislationthat would compel the state to break up its annual pension contribution into quarterly installments. Although it was sponsored by Democrats, the measure drew some support from Republicans as it advanced through the Legislature.
Under the bill, which is still sitting on Christie’s desk, the first quarterly state pension payment was to have been made on August 1.
Sponsors conceded that making the early payments would likely require the state to do additional short-term borrowing.
Since the payment for the current fiscal year is projected to total $1.3 billion, about $325 million would have been paid on August 1, and another $325 million would be due on November 1.
But they said that the state, even after paying the typically low interest charged on short-term notes, would still make out due to investment gains the pension payments would yield. That’s because the $80 billion pension system is professionally managed on a daily basis by Treasury department employees and has an assumed annual rate of return of 7.9 percent.
The pension system did far better during the 2014 fiscal year, enjoying nearly returns of nearly 17 percent. Though final numbers for the 2015 fiscal year are still being calculated, the returns are expected to be more modest, at around 5 percent. Still, even in a down year, the pension system should yield higher returns than the interest the state is paying RBC Capital this year on its short-term borrowing.
But Treasury officials have likened that approach to “arbitrage” and have said warnings from Wall Street ratings agencies specifically caution against the state doing too much short-term borrowing. Treasury officials would not comment yesterday on the bill requiring quarterly payments.
Lawmakers, meanwhile, also sent Christie a bill in late June that calls for a $300 million supplemental pension-system appropriation that, if made, would be attributed to the 2015 fiscal year. Christie has also yet to act on that measure.