Cash-starved New Jersey has a chance to save nearly $250 million by refinancing a significant amount of its transportation debt, but state lawmakers have yet to give their legally required approval of the deal.
Although that procedural step is likely to come next week, the ongoing budget dispute between Gov. Phil Murphy and legislative leaders — and the possibility for the second government shutdown in as many years — has threatened to rattle investor confidence in the state even as the refinancing issue is pending.
In fact, administration officials estimate that, by not acting sooner, the state may have already lost out on about $1 million in possible savings, in part because the Federal Reserve raised its benchmark rate a week ago; Murphy signed off on the refunding on May 31.
Refinancing the transportation bonds won’t generate money that could be used to offset any of the tax hikes that are at the heart of the budget disagreements in Trenton. But it would free up more cash for the Transportation Trust Fund, and help to maximize its eight-year, $16 billion spending plan.
The proposal to refinance more than $3 billion in transportation bonds won final approval from the state Transportation Trust Fund Authority on May 23. According to the authority’s meeting minutes, the refinancing would involve $1.8 billion of so-called TTF system bonds, and another $1.4 billion in debt backed by federal highway dollars, or GARVEE bonds.
Hundreds of millions of dollars to be saved
The state estimated refunding of the system bonds would yield up to $138 million in savings based on last month’s market conditions. The savings estimate for refunding the GARVEE bonds is about $100 million. The system bonds were issued in 2007 and 2008, and the GARVEE bonds were issued in 2016. The proposed refinancing would reduce overall debt service without adding any time to the bonds’ maturity schedule, according to the minutes.
But, in addition to getting a sign-off from the authority and the governor, the refinancing proposal also needs to be approved by the Joint Budget Oversight Committee, a panel made up of Republicans and Democrats from both the Assembly and Senate. The six-member panel known as JBOC is controlled by Democrats, by a 4-2 margin.
The committee received detailed information about the transportation-bond refinancing opportunities on May 31, the same day Murphy approved the proposal, according to an administration official. The panel requested additional information from the Department of Treasury’s Office of Public Finance on June 4 and it was immediately provided, the official said. But since then, JBOC has yet to hold a meeting to consider the refinancing.
No JBOC meetings are currently listed on this month’s official legislative calendar, but a spokesman for Senate Budget and Appropriations Committee Chair Paul Sarlo (D-Bergen), a leading member of the committee, told NJ Spotlight yesterday in response to questions about the status of the refinancing that a meeting would be held to approve the refinancing issue next week.
“Senator Sarlo has received the request and he is acting on it by quickly scheduling a JBOC meeting for next week to give the required approval,” said spokesman Richard McGrath.
Budget battle is the backdrop
“He recognizes the importance of taking advantage of this opportunity to capture real savings that will help sustain financing for the transportation fund,” McGrath said. “It’s the type of thing we should always be looking for to make government as cost-effective as possible.”
The eight-year $16 billion reauthorization of the Transportation Trust Fund was enacted by lawmakers and then-Gov. Chris Christie in 2016, as part of a broader deal on state tax policy that included hiking the gas tax by 23 cents. The same agreement led to a two-step reduction of the sales tax, which earlier this year was lowered to 6.625 percent as the final step.
Murphy is seeking to restore the sales-tax rate to 7 percent as part of his budget proposal for fiscal 2019, a $37.4 billion spending plan that would also establish a new income-tax rate of 10.75 percent on earnings over $1 million.
So far, lawmakers have rejected those two tax hikes even as they’ve largely agreed with Murphy on major spending priorities, which include increasing funding for the public-employee pension system, K-12 education, and mass transit. Instead, their own, $36.5 billion fiscal 2019 spending plan relies on a proposed hiking of the state corporate-tax rate for the highest-earning businesses. Under that proposal, which lawmakers approved on Tuesday, the rate would go from 9 percent to 11.5 percent for businesses earning between $1 million and $25 million annually, and to 13 percent for those earning more than $25 million annually. The 13 percent rate would be the highest corporate rate in the country, besting Iowa’s 12 percent rate.
Credit-rating agencies are watching
Lawmakers have scheduled votes today in both the Assembly and Senate on their own spending bill even though Murphy, who opposes the corporate-rate hike, has already promised he will issue a veto.
Even if the approval from JBOC comes next week, it’s expected to take the state another two weeks to bring the refinancing issue to market. That means the state’s bond rating could be influenced in the meantime by the outcome of the budget dispute as issues that are closely watched by credit-rating agencies — including the size of the state surplus and the use of one-time revenue sources — remain up for debate between the governor and lawmakers.
The ongoing delay in approving the refinancing issue has also already cost the state an estimated $1.2 million as the yield on 10-year notes has risen in recent weeks, and as U.S. Treasuries are coming into the market to offset revenue lost to the federal tax cuts enacted last year by President Donald Trump, state Treasury spokeswoman Jennifer Sciortino said yesterday. The Fed has already hiked benchmark rates twice this year and has also said more increases could be coming as unemployment remains relatively low and the overall economy remains strong.