Murphy’s $14B Fed borrowing plan clears full Assembly (updated)

The New Jersey Assembly approved Gov. Phil Murphy’s plan to borrow up to $14 billion to plug massive holes in the state budget left by the COVID-19 recession, though the measure now faces an uncertain fate with Senate leadership.

Republicans were staunchly opposed to the measure, but it ultimately garnered the support of the Democratic majority, winning by a 51-28 vote at the Assembly’s remotely-held Thursday voting session. They warned that they would file legal action against the law should it be signed, or at least support a lawsuit from some other party. There are no committee hearings scheduled on the Senate side.

Murphy unveiled the proposal in May, which calls for selling between $5 billion and $9 billion of bonds to the Federal Reserve, and up to $5 billion in general obligation bonds. The Federal Reserve program calls for buying half a trillion dollars in bonds from cash-strapped state and local governments as the global pandemic and government response to it shut down most businesses, shattering commerce and cratering tax revenue.

The legislation, Assembly Bill 4175, also lets the state sell up to $5 billion in general obligation bonds in the public and private markets, which the state has 35 years to repay.

State Treasurer Elizabeth Maher Muoio said the goal is to not borrow that entire amount of money, but did not indicate just how much they would seek.

“Our intention is to borrow only as much as absolutely necessary. We understand that borrowing is not free. But it is one of several crucial options we need at our disposal,” Muoio told lawmakers on Monday.

New Jersey is seeing a revenue shortfall of $10 billion through June 2021, and on top of that, could likely shell out billions of dollars more to finance its response to the COVID-19 pandemic.

State officials are planning to cut or delay $5.3 billion through Sept. 30, the new end of the current fiscal year.

“Without more robust and flexible federal aid, as well as the ability to borrow, the cuts that will be required to produce a balanced … budget will be devastating,” Muoio said.

That could mean cuts to property tax relief, higher education, Medicaid funding, teachers, and public safety services like police officers and firefighters, Muoio and Murphy have argued.

“We have no plans to raise property taxes,” Murphy said at his daily COVID-19 press briefing Thursday afternoon at the Trenton War Memorial.

But, he did not address questions from a reporter as to whether the state’s sales tax would be increased.

All the tools in the toolbox

Under A4175, the state would borrow the Federal Reserve money at a 2.8 percent rate that would be paid back in three years, after which the bonds would have to be refinanced. The debt will be paid back via sales tax revenue.

The borrowing would be backed by the “full faith and credit” of the state government, meaning that state officials and lawmakers could raise the sales tax, and even local property taxes, to ensure payments are made.

Many towns unable to borrow money by themselves, that have also seen property tax revenue plummet, would borrow the money through the state government.

Newark and Jersey City, which both have populations above 250,000, and Bergen, Camden, Essex, Hudson, Middlesex, Monmouth, Ocean, Passaic and Union counties, which have populations above 500,000, are the only ones that can directly borrow. Combined, they could borrow up to a combined $1.17 billion

Muoio said Monday that treasury officials would need “five to six weeks” to prepare the state’s application and then submit it to the Federal Reserve, followed by a two-week approval process before the state can go to the market.

And widely-expected legal challenges to the move – over whether Murphy overstepped his constitutional authority – could likely add months to that timeline.

Muoio, when pressed on Monday, would not say whether the money would come through to the state by Sept. 30. But should the state not have that borrowing authority by the next day – Oct. 1 – then “we would essentially be faced with shutting down” on that day, she added.

Worries have floated among lawmakers that to borrow could mean a hit to the state’s credit rating.

“The rating agencies understand the sign and unexpected impact of COVID, not just on the state of New Jersey but on all of the states. They are not expecting a miracle,” Michael Kanef, director of the Office of Public Finance, said on Monday.

“What they are expecting is appropriate fiscal prudence and sound fiscal management of the state in the face of the stress that we face, so that includes a combo of all the tools in the toolbox.”

Senate lawmakers have shown large degrees of skepticism. Senate President Stephen Sweeney, D-3rd District, has shown cautious support.

Lawmakers at the Senate Budget and Appropriations Committee on Monday also grilled Muoio when she testified on New Jersey’s short-term finances.

“We want to ensure, before we borrow one dollar, that we’re taking a look at every possibility” for savings,” Sen. Paul Sarlo, D-36th District, the committee chair, said on Monday.

“Looking at every potential alternative … I think that’s our job as part of providing oversight of the administration,” he said.

Editor’s note: This story was updated at 4:31 p.m. EST on June 4, 2020, to include the following sentence: “They warned that they would file legal action against the law should it be signed, or at least support a lawsuit from some other party.”