Whether Gov. Phil Murphy likes it or not, his bonding plans could stand as one of his lasting legacies. If the scheme survives a legal challenge, lawmakers and the governor will be able to borrow up to $9.9 billion through June of next year, in order to make up for lost tax revenue amid the pandemic-induced economic downturn. The state could be paying that debt for years to come.
A large portion of the borrowing would come out of a Federal Reserve program designed to help state governments whose finances have cratered. Business closures and job losses cost New Jersey $10 billion in tax revenue.
The non-partisan Pew Charitable Trusts on July 14 estimated that the state would borrow up to $4.5 billion with a three-year repayment plan at 3.8 percent interest, or at 2.6 percent under the plan Murphy supports.
But another sizable chunk would be borrowed from the private markets through the issuance of general obligation bonds and could take decades to pay back.
According to a July 21 analysis from the non-partisan Office of Legislative Services – an arm of the state Legislature – for every $1 billion borrowed, assuming a 20-year repayment plan for the general bonds and interest rates between 4 percent and 6 percent, the interest would total between $462 million and $730 million.
That would mean annual payments as high as $86 million a year, or as low as $73 million a year, OLS suggested.
Legislative Republicans, who sued on July 16 to block the plan, were scheduled to file their briefs with the state Supreme Court on July 24. The defendants – Gov. Phil Murphy and his administration – have until July 31 to respond. Oral arguments are slated for Aug. 5.
The GOP argues that the state cannot use bond proceeds as general revenue. Any debt that surpasses 1 percent of the total spending in a fiscal year would need voter approval. “We can’t pass this bill,” Assemblyman Jay Webber, R-26th District, said during the July 16 Assembly debate on the measure.
“On the first day of every legislature we take an oath,” he added. “The Constitution of the State of New Jersey does not allow you to do what you want to do. It does not allow you to borrow for operating expenses.”
But the measure that Murphy signed allows the state to sidestep the voter approval process, by using emergency powers to deal with a major natural disaster, also referred to as an “act of god.”
The Republican lawsuit cites the landmark 2004 Supreme Court ruling in Lance v. McGreevey. At issue in that case was whether then-Gov. Jim McGreevey could use bond money as “revenue” to balance the budget. The Republican leader at the time, Leonard Lance – later a GOP congressman – joined fellow Republicans former Sen. Joseph Kyrillos and former Assemblyman Alex DeCroce who argued that the move ran afoul of the state constitution. Webber helped write the briefs in the case.
“I do not want the exception to swallow the rule, meaning that the exception for an ‘act of god’ I don’t think, should be at the level of $10 billion,” Lance said in an interview.
“I recognize the differences,” Lance said, between 2004 and the current financial calamity facing the governor. “If the Supreme Court permits this, I hope it permits it only temporarily.”
The Lance decision effectively handed victory to both sides. The justices found that the plaintiffs were correct in that the plan did not meet the legal definition of “revenue” but they stipulated that the ruling was prospective only, allowing the borrowing to proceed.
“New things are popping up here,” explained Marc Pfeiffer, a municipal finance expert and a crafter of several of the state Legislature’s “Path to Progress” proposals on how local governments could save money and cut property taxes. “That’s going to create some really different opinions of how things are being done.”
Murphy has not outlined how the borrowed funds would be used. And it’s not clear whether any of the money would be spent through the end of the three-month budget extension on Sept. 30, or just for the new fiscal year which runs between Oct. 1 and June 30, 2021. Murphy said on July 17 that all signs point toward the latter, because preparations for borrowing could take up to 12 weeks, running beyond the expiration of the current budget.
The authorization lawmakers sent him would allow the state to issue up to $2.7 billion worth of bonds through Sept. 30, and up to $7.2 billion more between Oct. 1 and June 30, 2021.
“If they can get legislative leaders to agree … they might do it very short-term if they think they’re going to get federal funds,” said David Hitchcock, an analyst at the Wall Street credit rating agency S&P Global. That is, “short-term, if you’re going to get federal funds in two months, maybe.”
State lawmakers have indicated that it’s too early to tell just what expenses the bonding would finance, though they have general, broad ideas. A four-member legislative committee would have to approve any borrowing the Murphy administration wants.
Senate President Stephen Sweeney, D-3rd District, and Assembly Speaker Craig Coughlin, D-19th District, are likely to sit on the panel along with Assembly Budget Chair Eliana Pintor Marin, D-29th District, and Senate Budget Chair Paul Sarlo, D-36th District.
Pintor Marin suggested that some proceeds could be used for the Department of Human Services’ food stamps program, as well as equipment and supplies for the state Health Department to bolster the response to COVID-19. She also suggested cash infusions for the state Labor Department’s overloaded unemployment system.
“If we don’t get the funding, obviously we’re going to have to raise taxes, obviously we’re going to have to cut substantially,” Pintor Marin said in an interview.
Putting it before voters in a referendum during the Nov. 3 general election could draw out the process where, almost literally, time is money, she warned. “It’s going to take a lot longer in order for us to put it on for a referendum, and by the time we would even receive financing, we would already be devastated,” she said.
Sweeney said he is still hopeful that U.S. Sen. Bob Menendez, a Democrat, will succeed in his effort to include funds for cash-strapped states in a new federal pandemic relief bill. “That should take some of the pressure off of us,” he said.
Illinois is the only other state taking advantage of the Federal Reserve’s program, according to Geoffrey Bushwick, another S&P analyst. The option is something of a last resort. New Jersey has roughly $44.4 billion in bonded debt, according to the state Treasury, which costs roughly $4 billion each year to finance. “Other entities have said ‘we’re not sure we want to go that route,’” Bushwick said.
Sweeney and Sarlo both offered assurances that the state would only borrow as much as needed.
“We’re looking at our collections,” Sweeney said. “They’re better right now than what they were projected to be.”
New Jersey will not know exactly how badly the pandemic has damaged its economy and tax coffers until the state Treasury is able to crunch numbers from tax filings submitted ahead of an extended July 15 deadline. Murphy then has until Aug. 25 to present a new budget for the 2021 fiscal year. His $40.9 billion spending plan proposed in February is all but dead and the state is facing a budget shortfall of at least $7 billion.
Compounding that could be another financial hit to the state and its economy from a second wave of COVID-19 that coincides with the fall flu season, with perhaps another $20 billion necessary to prepare for and contain the virus.
A variety of options are still on the table to raise cash, depending on how the legal challenge is resolved. “If the court says no, the question is what will they be saying no about?,” Pfeiffer said.
“If the court knocks it down, it’ll knock down the $5 billion in permanent spending, and then they’ll be able to keep the short-term notes alive,” he added. “The short-term borrowing can be refunded, which means turning it into permanent debt if you refund it. If you refund the short-term borrowing with the long-term debt, you’ve done the same thing.”
But such an action could also run into legal problems, he cautioned.
Another option is pay-as-you-go borrowing, Hitchcock said, which can be done without bonding.
He also noted that the act of delaying more than $1 billion in payments until Oct. 1 would allow the state to use other kinds of short-term instruments, known as cash flow notes, which have to be repaid before the end of that fiscal year.
Those payment delays are a critical element of the three-month stop-gap budget that Murphy signed on June 30, but they need to be paid on Oct. 1.
“How are they going to repay” the bonds, Hitchcock asked. “Well the way they do that is you don’t pay your bills for a little while and you can build up your cash,” he said. “That means you’re not paying schools or pension payments or whatever for a period of time.”
On Oct. 2, the administration could push off another few billion dollars until July 1, 2021–or the start of the 2022 fiscal year, and issue more bonds to repay by June 30, Hitchcock suggested.