Gov. Phil Murphy’s administration is finalizing the sale of $400 million in state general-obligation bonds, debt that will finance school, library and environmental projects already approved by voters.
Under terms of the bond sale reviewed by administration officials on Thursday, the debt is being issued this month with a 20-year maturity and a true interest cost of just over 2%.
“We are encouraged by the strong demand investors continue to show for New Jersey paper as evidenced by the low true interest cost we received and the number of parties that bid, which is a sign of the faith investors have in the state’s credit,” said Treasurer Elizabeth Maher Muoio.
New Jersey is already one of the nation’s most indebted states, and the latest official tally of the state’s bonded debt is due to be released by the Murphy administration on Friday.
But this year, lawmakers have been airing new concerns about state borrowing during budget hearings for Murphy’s $44.8 billion spending plan for the fiscal year that begins on July 1.
Blockbuster borrowing last year
Those concerns have been raised in the wake of last year’s issuance by the Murphy administration of nearly $4 billion in general-obligation bonds, without voter approval, in response to fears about the economic impact of the coronavirus pandemic, including projected revenue losses that never fully materialized.
Nonpartisan legislative fiscal analysts have since suggested the emergency borrowing issue in hindsight was not necessary because tax collections ultimately outpaced the dire losses forecast by the administration during the worst months of the pandemic.
Several lawmakers have said in recent weeks that at least some of an estimated $6.4 billion in COVID-19 relief funds New Jersey is due to receive under the federal American Rescue Plan Act should be used to pay down state debt. Final guidance on how that funding can be spent is still pending from the U.S. Treasury.
Meanwhile, state lawmakers also approved last week a refinancing — projected to save an estimated $400 million — of New Jersey Transportation Trust Fund debt, without extending the maturity for any of the bonds. The savings can be used to fund new road, bridge or rail-network improvements, or to fund current or future trust fund debt payments, Treasury officials said.
Where this money will go
Most of the proceeds from the state’s new bond sale, an estimated $325 million, will fund school upgrades, according to a ballot question approved by voters in 2018. The upgrades include K-12 and county college career-technical education projects; school water-infrastructure improvements, and general upgrades in school security.
Another $50 million from the bond sale will be used to finance local library upgrades under a ballot question that won voter approval in 2017. The remainder of the bond proceeds will fund previously voter-approved environmental projects, including for water-supply facilities and open-space preservation.
New Jersey, which suffered two credit-rating downgrades last year, has one of the worst debt grades of any U.S. state. That’s due, in part, to the state’s significant bonded and non-bonded debt; the latter category includes unfunded public-worker pension liabilities.
In their most recent credit evaluations issued in advance of this month’s bond sale, major Wall Street rating agencies left New Jersey’s debt grade unchanged, although Moody’s Investors Service did move the state’s credit outlook from “negative” to “stable.”
All-important credit rating
The state’s credit rating can be an important factor in determining how much interest taxpayers will be charged by investors who lend the state money to fund long-term capital investments.
As part of a more than 10% increase in overall year-over-year spending, Murphy’s proposed budget for the 2022 fiscal year calls for making what actuaries would consider to be the first full state pension contribution in the last 25 years.
However, Murphy’s proposed budget also calls for more than $4 billion in annual spending to be supported by nonrecurring or “one-shot” sources of revenue, including the spending down of budget reserves.
The state Constitution generally puts tight controls on annual spending and borrowing, but last year’s emergency debt issue was based on a rarely used clause that loosens those restrictions — including dispensing with the requirement for voter approval of general-obligation bond issues — during times of war or major emergency.
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. Last year’s emergency debt issue will be paid off with interest over the next 12 years.
In their recent review of New Jersey’s finances, Moody’s analysts highlighted “better-than-expected revenue performance” during the current fiscal year, but also flagged a “large structural budget gap and higher debt and fixed costs related to deficit financing.”
“Our view incorporates the impact of COVID-19 to date, but the pandemic and its long-term credit implications remain fluid,” Moody’s said.