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NJ opts to pay off up to $719M in oldest debt (updated)

New Jersey is set to pay off upwards of $719 million of its $44 billion in debt early under a budgetary practice known as debt defeasance.

The record $46.4 billion state budget in effect through June 30 next year includes $2.5 billion for just this purpose—for the state to pay off some of its most expensive and higher-interest debt.

Another $1.2 billion is set aside to prevent the state from taking on further debt, together forming a $3.7 billion “Debt Defeasance and Prevention Fund.”

Typically, the state borrows through general obligation bonds, and the interest rates are determined by the state’s credit rating. The bonds are more or less guaranteed: the state can raise taxes or find other sources of revenue in order to make the payments.

A six-page resolution listed dozens of bonds the state could choose to pay off, most of which carry an interest rate of 4% or 5%. The choice of which bonds to pay off “will be made based on market factors at the time,” the state Treasury Department said in the announcement.

In the coming weeks, the New Jersey Economic Development Authority and the New Jersey Building Authority will both also meet to determine which bonds they can pay off early.

$4 billion

Amid surging economic uncertainty last year, the state opted to borrow $4 billion to make up for potential revenue losses. The new debt will not be paid off until 2030. Since it cited wartime powers granted in the state constitution, the borrowing was able to bypass voter approval.

Republicans sued in the state Supreme Court to block the borrowing, saying it was too soon to tell whether New Jersey would actually need the funds.

With the state flush with cash from the $6.4 billion in federal relief from the Biden administration, and months of sustained and unexpected surges in tax revenue, they were ultimately correct in their assessment.

Sen. Steve Oroho

Oroho

Officials like Murphy and State Treasurer Elizabeth Maher Muoio said they could not possibly know at the time of borrowing what the state’s economic and financial situation could look like when they started borrowing last fall.

Murphy initially projected a budget hole as large as $20 billion for the state.

Last month, Republican state lawmakers lamented what they said was a slow pace the administration was taking in deciding what debt to pay down early.

“[E]xpensive bonded State debt that could have been retired continues to rack up interest costs,” reads the joint Sept. 24 letter from Assemblyman Hal Wirths and reported incoming Senate GOP Leader Steven Oroho, both Republicans from the 24th Legislative District.

This story was updated at 4:55 p.m. on Oct. 29 to clarify the amount and nature of the debt the state intends to pay off.

This story was updated at 8:05 a.m. on Nov. 1, 2021, a previous version indicated that the $4 billion borrowed by the state could not be paid back until beginning in the 2030s; that was incorrect, the debt will be paid off in 2030.


Daniel J. Munoz
Daniel Munoz covers politics and state government for NJBIZ. You can contact him at dmunoz@njbiz.com.

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