Moody’s Issues ‘Credit Negative’ in Response to Passage of TTF Legislation

Chase Brush | October 11, 2016 | Budget
Wall St. firm raises fiscal concerns about effect of tax cuts included in bill to replenish Transportation Trust Fund

Last week’s historic vote on legislation to replenish the Transportation Trust Fund was generally praised by lawmakers and state officials, who saw it as a welcome solution to a months-long impasse and a costly shutdown of road and bridge projects statewide.

But a major Wall Street firm, citing the legislation’s ultimate impact on the state budget, begs to differ.

In a report released yesterday, Moody’s Investment Service called the bill package “credit negative” and said that annual revenue loss stemming from the legislation will “worsen the state’s budget challenges” in the future. That comes just days after lawmakers passed the measures, which will infuse the beleaguered transportation fund with $16 billion over the next eight years. (According to Moody’s, a declaration of “credit positive” or “credit negative” does not connote a rating or outlook change, but is “indicative of the impact of a distinct event or development as one of many credit factors affecting the issuer.”)

The first bill (A-12), which pairs a series of tax cuts totaling some $1 billion with a 23-cent gas-tax increase, was passed in the Senate 24-14, and by the Assembly 44-27. The second bill (A10) allows the TTF to spend $2 billion a year on infrastructure projects. It passed 23-14 in the Senate, and 45-27 in the Assembly.

Under the legislation, the state’s 14.5 cent gas tax — the second-lowest in the nation — would rise to 37.5 cents in November, resulting in annual tax revenues of $1.2 billion that, when combined with new borrowing, would provide $2 billion in annual spending on transportation projects. But the state would also see a series of deep tax cuts, including a two-year phase out of the estate tax and a 0.375 percent decrease in the sales tax, a major source of revenue for the annual state budget.

All told, the cuts — when paired with the tax breaks for the working poor, veterans, and retirees living on pensions and other sources of fixed income also included in the plan — would cost the state $1 billion in revenue by the 2019 fiscal year and about $1.3 billion in fiscal 2020, according to the nonpartisan Office of Legislative Services.

During the rare Friday voting session, lawmakers in both the Assembly and the Senate stood to offer their final takes on the legislation. Those Democrats in support hailed it as a “historic” and “bipartisan” compromise that will end a costly road and bridge shutdown, now going on its fourth month, and boost the state’s economy through dedicated infrastructure spending for years to come.

“That difficult vote will allow us to make a significant investment in a crumbling infrastructure,” said state Sen. Paul Sarlo (D-Bergen), a bill sponsor. “Our state is ranked at the bottom when it comes to investment in our roads, our bridges, our utilities. We are at the bottom.”

“This is a balance, something that was stuck between both houses and the executive branch,” Assembly Speaker Prieto (D-Hudson) said. “It will put people back to work.”

Several Republicans in each house also voiced their support for the legislation, saying the state’s transportation crises is too serious to put off. They lauded the tax cuts included in the bill, which they said would bring much-needed relief to residents burdened by high property taxes in the state.

The estate tax in particular has long been a target for Republicans and conservative advocacy groups, who argue it drives out the state’s wealthy and forces down tax revenues. The legislation would lift the current exemption of $675,000 to $2 million at the beginning of 2017, and then eliminate it totally on January 1, 2018.

“We came up with a compromise that most people don’t like. But it is a compromise,” said Assembly Minority Leader Jon Bramnick (R-Union). “I’m proud to work with the Speaker. I would want many more tax cuts. But none of us as individuals control this legislature, or control the state of New Jersey.”

“How do you support it? I say how do you not,” said state Sen. Kevin O’Toole (R-Essex).

Others, however, decried the bills, arguing they would leave the state’s budget too far in the hole. Some, taking aim at the front office, criticized the decision to pair the sales tax cut with a gas tax, calling it a form of “unfair fairness.”

Gov. Chris Christie is expected to sign the new bills into law in the coming days.

“It’s a lot like gas,” said Assemblywoman Amy Handlin (R-Ocean). “It looks slick, but when you get close to it, it smells.”

“I stand to oppose this tax increase for the working class, middle class and those living in poverty that make 15,000, 40,000, 45,000 dollars a year that do not qualify for the Earned Income Tax Credit,” said state Sen. Jennifer Beck (R-Monmouth) on the Senate floor. “I stand in opposition on behalf of the seven million licensed drivers in the state, half a million of which drive vehicles from the 1980s.”

The division among Republicans, but also among Democrats, revealed just how politically charged the nature of the TTF compromise has been. Many who voted against it represent competitive districts in more rural parts of the state, and will face re-election in 2017. Next year will also feature a gubernatorial election that experts say will favor Democratic candidates like former Goldman Sachs executive Phil Murphy, making down-ballot Republicans particularly vulnerable.

Those tensions were apparent Friday, with Republicans arguing a vote in support of the legislation would betray residents in their districts. Some, like Assemblyman Jay Webber (R-Morris), also expressed skepticism over whether the tax cuts would ever actually be enacted, given the fact that Christie will be leaving office next year and could be replaced by a Democrat.

“We have to decide who we love. Do we love our constituents, or do we love the various interests, the various lobbyists, who are telling us they want more money in the pool that they can get their hands on?” state Sen. Gerald Cardinale (R-Bergen). “I’m going to make a decision that I love my constituents too much to vote for this bill.”

Democrats too seethed at the deal, saying it would set the state up for fiscal hardship in the future.

“When you look at this bill, in the words of a Star Ledger editorial, it puts New Jersey on a track to disaster,” said Assembly Transportation Chair John Wisniewski (D-Middlesex), who said the decrease in tax revenue would cost the state $12.3 billion over the next decade.

Moody’s yesterday appeared to side with those concerns, saying the tax cuts included in the legislation would reduce state revenues for costs such as education, human services, and pensions, which it said could result in a net loss to the general fund of about $1 billion by 2021. It also said that while the gas tax increase would raise approximately $1.2 billion, those revenues will be restricted to transportation projects under a proposed constitutional amendment that will appear on the ballot this November.

If voters approve that referendum, which legislative leaders called for amid TTF talks earlier this year, all of the money raised by New Jersey’s fuel taxes after the increase goes into effect would be dedicated to funding transportation projects.

“The new gas tax revenues will support $16 billion of transportation-related capital projects over the next eight years, providing significant improvements to the state’s burdened infrastructure and restoring construction jobs that were lost this past summer because of a lack of funding. However, the state plans to borrow against the new gas tax revenues, thereby increasing its debt load and fixed costs,” Moody’s said.

Among the state’s biggest budget challenges, Moody’s said, is the rapid growth of costs associated with the state’s beleaguered pension and benefit system, which is currently underfunded by some $40 billion and facing depletion dates for some of its small funds within the next decade. Based on the state’s projections, pension contributions will increase annually by an average of $711 million through fiscal 2023, approximately 1.9 percent of revenues, Moody’s said.

“We estimate the state’s revenues will have to increase approximately 4 percent annually to balance pension and other spending growth. Assuming the state takes no other actions to balance the net loss of $1 billion, revenues would have to grow 5 percent annually to balance pension and other spending growth. This growth target will be particularly challenging given the state’s below-average revenue growth of 3 percent annually since the recession,” the report said.

New Jersey’s debt rating has been downgraded by different investment services a record nine times since Christie’s been in office, mainly because of concerns over the state’s pension and benefit crisis.