Already one of the nation’s most indebted states, New Jersey could do more than a decade’s worth of borrowing within a year under a new law that authorizes selling bonds to fund the budget during the coronavirus pandemic.
The COVID-19 borrowing law, enacted by Gov. Phil Murphy last week, allows for up to $9.9 billion in bonds to be issued without voter approval between now and the middle of next year to make up for revenue losses triggered by the health crisis.
If the governor taps the full amount, the state’s total for bonded debt could increase by more than 20%, according to an NJ Spotlight analysis of Department of Treasury debt reports.
By contrast, over the last 10 years, New Jersey’s bonded debt increased by nearly 18%, according to the analysis.
New Jersey’s bonded debt, and what it costs
Released earlier this year, Treasury’s latest report on state borrowing tallied up a total of $44.4 billion in existing bonded debt. While the Murphy administration had been making progress paying down long-term debt in recent years, the latest figure from Treasury still amounts to roughly $5,000 for every man, woman and child living in the state.
Among U.S. states, New Jersey’s net tax-supported per-capita debt ranks fourth-highest, according to the latest assessments from Moody’s Investors Service, the credit rating agency.
To service its debt and cover interest costs, New Jersey spends about $4 billion annually, which takes up roughly 10% of the total state budget. For comparison’s sake, those annual debt payments equal nearly half of what the state spends each year on direct “formula” aid to K-12 school districts, and nearly four times the amount devoted annually to fund direct property-tax relief programs like Homestead and Senior Freeze.
Murphy and Democratic legislative leaders have said the state will only borrow as much as needed to offset projected revenue losses during the pandemic. Adding the full $9.9 billion to the state’s debt ledger between now and the middle of next year would result in an increase of about 22% in the state’s bonded debt if all other conditions stay generally the same, according to the NJ Spotlight analysis. And it could mean a 36% increase in bonded debt during the years spanning the 2012 and 2021 fiscal years.
But there’s also the potential for the state’s bonded debt to increase even more in the near term.
For starters, the Murphy administration has already issued more than $800 million in new debt this year that did not make it into Treasury’s most recent tally. Those bonds, which should be recorded on the next official debt report, are raising money for New Jersey Transit equipment purchases and to finance school and library facility upgrades, among other purposes.
And that’s not all.
Murphy in recent months has also proposed issuing some $600 million in new debt to finance the replacement of the Portal Bridge, a century-old Northeast Corridor rail bridge spanning the Hackensack River near the Secaucus Junction train station. The bridge is owned by the federal government, but used by both Amtrak and NJ Transit, and the $600 million would help cover the state’s share of a planned $1.8 billion replacement project that is also in line to receive significant federal funding.
The governor has also called for another $500 million in new debt to help address concerns about tainted drinking water by financing the replacement of aging lead-service lines.
What New Jersey’s existing debt is funding
A significant portion of the $44.4 billion that New Jersey already owes its investors is financing things like the construction or maintenance of roads and bridges, and the building of schools. These capital projects can’t be fully funded in just one annual state budget, necessitating the need to issue long-term bonds with interest.
State bonds have also been issued in past years to underwrite the preservation of farmland and other open space, and to upgrade facilities at state colleges and universities, among other purposes, according to Treasury’s debt reports.
New Jersey’s largest current debt authorization, according to other Treasury records, is $12 billion approved in 2016 for transportation capital projects. That debt isn’t being offered all at once, but in increments over several years.
A debt authorization totaling $8.6 billion was approved in 2000 during the tenure of Republican Gov. Christie Whitman to finance school construction, according to Treasury. Another $3.95 billion in debt was authorized for the same purpose in 2008 during the tenure of Democratic Gov. Jon Corzine.
Meanwhile, the state’s largest one-time “new-money” bond sale that didn’t involve any refinancing occurred in 1997, when Whitman’s administration sold nearly $3 billion in long-term debt to fund public-worker pension obligations. Those bonds were backloaded, with the largest payments coming at the end, and won’t be paid off in full until 2029.
Voter approval — or not
On paper, when governors and lawmakers want to finance large capital projects that total more than 1% of the annual budget, the state Constitution requires them to first get approval from voters in a statewide referendum. That’s supposed to keep the state from running up a large credit-card bill unless voters sign off.
But governors and lawmakers frequently get around that restriction, including by using outside agencies like the state Economic Development Authority.
For example, the Murphy administration was able to issue $500 million in new debt earlier this year to fund the purchase of new locomotives and buses for NJ Transit by using bonds issued through the EDA that did not require a sign-off from voters. Former Republican Gov. Chris Christie used a similar process in 2017 to issue $300 million in bonds without voter approval to finance an ongoing renovation of the State House in Trenton.
The COVID-19 borrowing law allows for up to $2.7 billion in debt to be issued between now and Sept. 30, and another $7.2 billion between Oct. 1 and June 30, 2021.
The law does not require voter approval for any of those potential bond sales even with a statewide election scheduled for the fall, when the issue could have been put on the ballot for voters’ consideration.
The Murphy administration has argued that constitutional restrictions on spending and debt do not apply during times of war or major emergencies. But Republicans have disputed that claim, and they’ve filed a lawsuit against the governor seeking to block him from issuing bonds to finance deficit-spending during the pandemic.
The state Supreme Court has agreed to take up the case on an expedited basis, and oral arguments are scheduled for early next month.
New Jersey’s other forms of debt
In addition to money borrowed from investors through bond sales, the state also has a series of “non-bonded” obligations on its books. Like the bonded debt, these obligations are also closely scrutinized by credit-rating agencies when they set the state’s bond rating or outlook.
Included in the non-bonded debt category are the estimates of what the state owes retired public workers, including for pension and health benefits.
New Jersey has a long history of underfunding required employer pension contributions — including during Murphy’s tenure — and its unfunded pension liability was estimated to be near $100 billion in the latest debt report. The projected long-term cost of funding retiree health-insurance obligations added up to another nearly $76 billion, the report said.
The grand total of all of New Jersey’s long-term obligations, both bonded and non-bonded, came in at just under $218 billion, which is roughly $24,500 for every man, woman and child currently living in New Jersey, according to the NJ Spotlight analysis.