Buoyed by investor response, NJ to move on $4B in COVID borrowing

Officials say keen interest on Wall Street will keep interest charges below 2%, despite ratings downgrade
State Treasurer Elizabeth Maher Muoio

Gov. Phil Murphy’s administration is expected to sign off Wednesday on a debt sale that will bring in more than $4 billion to help sustain the state budget during the lingering coronavirus pandemic.

The general-obligation bond issue was priced a day earlier than had been expected due to strong interest among investors, state Treasurer Elizabeth Maher Muoio said in a statement Tuesday.

The total interest cost of the tax-exempt debt issue, pending final approval from administration officials on Wednesday afternoon, is expected to be just under 2%, Muoio said.

“We are extremely pleased,” she said. “We believe the significant oversubscription we witnessed and the favorable interest rate we received is a sign that investors have faith in New Jersey’s fiscal outlook.”

New Jersey has been hit hard by the pandemic, with more than 285,000 COVID-19 infections reported as of this week, 16,000 deaths and public health statistics worsening by the day as a second wave takes hold. The health crisis has also brought on a series of restrictions that have diminished economic activity across the state.

Murphy, a first-term Democrat, pressed lawmakers earlier this year to authorize up to $10 billion in borrowing without voter approval to help offset anticipated revenue losses linked to the pandemic.

The New Jersey Constitution generally prohibits using borrowed money to fund current spending, but it allows for exceptions such as responding to war or a major emergency.

Making up for revenues lost to the pandemic

Murphy enacted a new state budget in late September that relied on a total of $4.5 billion in borrowed funds to help sustain a year-over-year spending increase despite the projected decline in tax revenue.

Murphy and the Democrats who control the Legislature also agreed to hike taxes — raising the personal income-tax rate on earnings between $1 million and $5 million, and retaining a surcharge on the income of top-earnings businesses that was supposed to be only temporary.

Department of Treasury officials had told lawmakers in the weeks leading up to the adoption of the new budget that they were expecting to issue roughly $4 billion in debt, with an annual interest cost of around 2% based on a 10-year repayment schedule.

Details of the borrowing package were disclosed by Treasury officials in advance of Wednesday’s meeting where Muoio and other Treasury officials are expected to formally approve the bond sale. It is expected to raise $4.28 billion, with a true-interest cost projected to be under 1.95%.

Repayment will occur over 12 years, but principal payments won’t begin until the third year of repayment, the officials said. The bonds are also being structured as “noncallable,” meaning they cannot be paid off early, officials said.

Legal challenges

State lawmakers in mid-July approved up to $9.9 billion in emergency general-obligation borrowing in response to the pandemic, a move that sidestepped the voter approval that typically is required with state bond sales. A legal challenge by the state Republican Party and several GOP lawmakers was denied weeks later by the state Supreme Court.

General-obligation bonds are the state’s most secure form of debt, and they involve a pledge to raise taxes, including the general sales tax, to ensure investors are repaid.

The latest tax-collection reports from Treasury have offered some signs that the state’s revenue losses may not be as severe as once forecast by the administration. Moreover, a revenue certification issued by Murphy earlier this month indicated the current projected shortfall due to the pandemic is $4.2 billion, marking a slight improvement since September, when it was put at $4.5 billion.

Still, New Jersey’s credit rating took a big hit in the run-up to the bond sale, with S&P Global Ratings knocking the state’s general-obligation debt grade by one step to “BBB+” over concerns about “significant structural deficits.”

In April, as the pandemic was raging in the state, New Jersey’s credit rating was also lowered one notch by Fitch Ratings, another major Wall Street rating agency, after the state disclosed its brewing budget problems.

Murphy faces reelection next year, and credit-rating downgrades can be politically embarrassing for a sitting governor. They can also lead to higher borrowing costs that ultimately are passed along to taxpayers whenever the state has to issue long-term bonds to cover expenditures.

Thanks largely to the emergency borrowing, one-shot sources of revenue are covering roughly 14% of total spending in fiscal year 2021, the highest amount since the Great Recession, according to budget documents. How that gap is filled in the next budget remains a big question for Murphy and lawmakers because the emergency-borrowing authorization expires on June 30, 2021.