New Jersey Scraping the Bottom of Roadwork Fund as Tax Fight Looms
New Jersey’s sale of $627 million in debt, the last borrowing in a five-year funding plan for transportation projects, is a political turning point.
Come July 1, the state will have exhausted its $8 billion capital budget for roads and mass transit, and no replacement plan is in place. A higher gasoline levy, with proceeds going to the state’s transportation trust fund, has support among Democrats who control the Legislature, though not from Republican Gov. Chris Christie, who’s running for president on his record of rejecting tax increases.
New Jersey has an $83 billion unfunded pension liability after more than a decade of skipped and lowered payments. The state’s credit rating has been downgraded a record nine times under Christie because of rising employee costs and missed revenue targets. And with an impasse over how to replenish the transportation fund and shore up the retirement plan, investors are demanding higher yields to buy New Jersey’s bonds, which have lagged every other major state this year.
“There’s real lack of agreement in the government for anything now,” said Dan Solender, the head of municipal debt in Jersey City, New Jersey, for Lord Abbett & Co., which holds about $17 billion of the securities. “With the pension issue not getting better and budget challenges overall, in the short term it doesn’t appear that there’s any trigger for things to change.”
Fitch Ratings has an A- rating on the transportation trust-fund bonds that are scheduled to be sold Nov. 17, the seventh-highest grade and a step below the state’s general-obligation ranking. Christopher Santarelli, a spokesman for the state treasury, said the borrowing has “significant interest from large institutional investors.”
New Jersey, the most densely populated U.S. state, relies on a network of superhighways, airports and ocean terminals to drive its economy. Pension and benefit payments, plus debt costs, have diminished the state’s ability to pay for infrastructure improvements. The gasoline tax, $500 million annually that is supposed to fund transportation needs, instead goes to pay off past debt.
Politicians who raise gasoline costs risk backlash from New Jersey homeowners , who already pay the highest property taxes in the United States. Voters, who in April signaled they would be willing to pay more for fuel, now oppose a higher tax by 62% to 35%, according to a Nov. 11 Quinnipiac poll.
Christie in 2011 pledged to use more cash and less debt for highway and bridge repairs. Instead, as state revenue came up short of forecasts, he put no money into the transportation fund for three years and borrowed $1 billion more than promised to keep it alive.
Democrats, who are lining up in the 2017 race to replace the term-limited Christie, say the state has no other choice but to raise fuel levies. New Jersey’s gasoline tax, 10.5 cents per gallon, is higher only than those of Alaska and Georgia, tied at 8 cents, according to the Energy Information Administration.
“There’s definitely going to be a tax — we have to pay for it,” said Assembly Speaker Vincent Prieto, a Democrat from Secaucus. “The low-hanging fruit is the gas tax. Given where gas is right now, that’s the one.”
The lack of agreement over how to bolster the state’s finances has caused investors to demand higher yields to own its debt instead of top-rated securities. New Jersey 10-year bonds yield about 3.16%, about a full percentage point more than benchmark debt. That gap has doubled since January.
New Jersey securities have returned 0.71% this year, the least among 27 states tracked by Standard & Poor’s Dow Jones Indices. That compares with a gain of 1.9% for the overall municipal market.
When New Jersey sold about $80 million of debt last week, bonds due June 2025 were priced to yield 4.2%, 2 percentage points over top-rated 10-year bonds. Those yields were a draw to buyers: The state received orders for five times the number of securities that it was selling, according to Santarelli, the state treasury’s spokesman.
The increase in the gas tax may not be enough to cut those borrowing costs, said Paul Brennan, a portfolio manager in Chicago at Nuveen Asset Management, which oversees about $100 billion of munis. He said the state could just borrow against the higher collections.
“There’s certainly recognition among investors that the story is not as strong as it was a year agoand two years ago,” Brennan said. ‘Therefore, we’re going to charge you — the state — more to borrow because we don’t have the same amount of confidence.”
