New Jersey must come up with new funding out of the state budget to keep from defaulting on a long-term debt obligation that dates to the tenure of former Gov. Jim McGreevey.
Legislation introduced in the Senate last week seeks approval for a supplemental appropriation of up to $30 million to cover the debt payment on a controversial state bond issue that was used to sustain the annual budget nearly two decades ago. The payment is due July 1.
Surcharges levied for certain driving offenses that are collected through the New Jersey Motor Vehicle Commission are supposed to be the main source of funding for the debt service, but that revenue is coming up short during the ongoing coronavirus pandemic, according to a recent analysis by the nonpartisan Office of Legislative Services.
This is the first time since the bonds were issued in 2004 that a general appropriation has been requested to help cover the debt payments, the analysis said.
Less traffic, fewer citations
Officials from the Murphy administration attribute the shortfall to several factors, including a general reduction in road traffic during the pandemic that, in turn, triggered a decline in motor-vehicle citations.
It remains to be seen how long the shortfalls could last, but in his budget proposal for the 2022 fiscal year, which begins July 1, Gov. Phil Murphy has included another $10 million to cover debt service for the same bond issue. (Approval of a supplemental spending bill is required to fund the debt service out of the budget during the current fiscal year because no money was allocated for that purpose when the 2021 fiscal year budget was approved last year.)
“We are closely monitoring collection of these surcharges to determine what level, if any, of shortfall may occur in the future,” Treasury spokeswoman Melinda Caliendo said.
Coming up with the funds needed to keep McGreevey’s bond issue afloat should be no problem for a state whose fiscal outlook has improved dramatically in recent months, despite the ongoing pandemic.
Still, the supplemental spending request comes as Murphy, a Democrat who faces reelection later this year, has faced criticism for borrowing money last year to sustain annual spending, just as McGreevey, a Democrat who was in office from January 2002 to November 2004, did nearly two decades ago to help cover his own spending.
Budget and legislative records show that McGreevey balanced his fiscal year 2005 spending plan with nearly $2 billion in upfront funding raised through the pledging, or “securitizing,” of future revenue collections, including several decades’ worth of motor vehicle surcharges.
According to the state’s latest annual debt report, debt payments for New Jersey’s Motor Vehicle Surcharges Securitization Act of 2004 are owed through the 2035 fiscal year.
Decline in traditional source of funding
Over the last few years, revenue collected from the surcharges has slowly declined, according to information provided by the administration to the Office of Legislative Services for its analysis of Murphy’s latest state budget proposal. Despite the decline, the surcharges were still generating enough funds to cover the annual debt payments until the pandemic hit last year, according to the OLS analysis.
“The pandemic is responsible for creating economic hardships for drivers and the closing of and limited reopening of the courts has impacted revenue collections. Also, ride sharing services have impacted DUI violations,” administration officials wrote in response to written questions about the latest MVC departmental budget that were posed by OLS fiscal analysts.
Caliendo said the Motor Vehicle Commission in March 2020 also stopped seeking judgments against drivers who weren’t making surcharge payments, causing a reduction in automatic collections from things like tax refunds and rebates that can occur when a motorist fails to make surcharge payments and has a collection action issued against them.
“Due to a lack of history, it is uncertain what the long-term impact of these factors will be on the State’s collection of surcharges,” Caliendo said.
No worries on Wall Street
A notice issued earlier this year by major Wall Street credit-rating agency Moody’s Investors Service indicated the state had announced in March that the surcharges would “likely not provide full coverage of the next debt service payment on July 1.”
The Moody’s analysts also seemed to downplay the potential for a default, saying New Jersey has a long history of covering such debts. Moreover, the projected shortfall would represent a “relatively small amount compared to the state’s $40 billion fiscal 2021 budget,” Moody’s said.
“Based on the proactive governance demonstrated to date and the state’s strong connection to this contingent liability, we expect the Legislature to appropriate for debt service on its bonds in advance of the payment due date,” Moody’s said.
The legislation introduced by Senate President Steve Sweeney (D-Gloucester) last week seeks to add the up to $30 million in supplemental spending to a nine-month budget bill that Murphy and lawmakers enacted last year, all to ensure the July 1 debt payment is covered.
Long-term debt is typically issued by state and local governments to fund capital investment in things like schools and bridges that can last for generations.
It raised eyebrows in 2004
McGreevey’s bonding maneuver raised eyebrows at the time because it was used primarily to support a single year’s state budget. It also appeared to conflict with tight restrictions on annual spending and borrowing written into the state Constitution.
Several Republican lawmakers who opposed the bond sale would go on to contest it all the way to the state Supreme Court, which ultimately issued a ruling that did not undo the borrowing, but also established a strict definition of “revenue” for state budgeting purposes that generally excluded bond proceeds “on a prospective basis.”
But amid the pandemic last year, Murphy cited another clause in the state Constitution that relaxes the restrictions on spending and borrowing during times of war or major emergency as the grounds for borrowing to offset dire revenue losses his administration projected at the time.
With authorization from lawmakers, the Murphy administration issued nearly $4 billion in general-obligation debt last November after another court challenge by Republicans failed to block the emergency borrowing.
Earlier this year, OLS fiscal analysts suggested the emergency borrowing in hindsight was not necessary because tax collections ultimately outpaced the losses forecast by the administration during the worst months of the pandemic. The Murphy administration is now projecting the state will have more than $6 billion in reserve for the start of the 2022 fiscal year.
The nearly $4 billion in emergency debt must be paid off with interest over the next 12 years, but the Murphy administration deferred payments on the principal portion of the debt for the first two years. Unlike McGreevey’s 2004 debt issue, no specific source of revenue was pledged to pay off the emergency bonds, meaning payments are expected to be covered by the general budget. The debt was also issued as “noncallable,” meaning it cannot be paid off early.