ALG Editor’s Note: In the following featured column from Barron’s, Randall Forsyth outlines the fiscal responsibility policies of New Jersey Republican Governor Chris Christie:
New Jersey’s “Just Say No” Debt Plan
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By RANDALL W. FORSYTH
NEW JERSEY HAS MADE GREAT CONTRIBUTIONS to the nation’s culture. Not The Sopranos and Jersey Shore, but to American music. To be sure, there’s Bruce Springsteen, but the greats also include Count Basie from Red Bank, Sarah Vaughn from Newark and, of course, Frank Sinatra from Hoboken.
Where New Jersey potentially could lead next is in tackling its debt crisis. As Europe prepares a bailout for Greece, New Jersey is attacking its fiscal mess head-on.
The Garden State last November elected a governor who vowed to “just say no” to raising taxes. The voters underscored their message by voting down a majority of school budgets earlier this month.
This stance could make New Jersey a test case for the rest of the country, writes Howard J. Cure, Director of Municipal Research for Evercore Wealth Management, a New York money manager for high net-worth individuals with $1.6 billion under management. The outcome of that test is by no means certain, however.
For New Jersey investors seeking income sheltered from the state’s crushing taxes, Cure suggests a number of essential-service revenue bonds with stable finances as an alternative to government-backed bonds “until we are convinced that structural changes to the state’s finances have become permanent.”
Unlike his predecessors, Republican Gov. Chris Christie has recognized that high taxes were a problem, not the solutions to the state’s fiscal woes. The Tax Foundation ranks New Jersey as the highest in the nation in state and local taxes as a percentage of income. It’s especially bad for top earners: 4.4% of individuals account for 55% of personal income-tax revenue.
Even though the state faces a $10.7 billion deficit — equal to more than one-third of the total budget — in fiscal 2011 starting July, Christie has refused to raise taxes and further increase this tax burden. Indeed, he has recommended not renewing a 2% “millionaire tax” enacted by former Gov. Jon Corzine, so that the top state income-tax bracket will revert to 8.97%, still among the highest in the nation.
In addition, New Jersey homeowners pay the highest property taxes in the nation, $7,281 on average annually. That represents a 90% increase from 1999 to 2009 — a trend that is driving wealthy New Jerseyans to other states — mainly Florida, Pennsylvania and even New York, according to Boston College’s Center on Wealth and Philanthropy. As Cure notes, for years the migration went in the other direction across the Hudson as heavily taxed New Yorkers sought relief in New Jersey.
Christie has proposed $10.1 billion in spending cuts while projecting a $600 million increase in revenues as tax receipts finally show signs of growing. The biggest cut — $3 billion in pension expenses — seems to fly counter to the state’s chronically underfunded retirement liability. But the governor contends that reforms have reduced the system’s underfunding. And Cure adds that the recent publicity about generous public-employee pensions has allowed the legislative and executive branches to address this problem.
The governor also proposed a constitutional amendment to cap property-tax increases at 2½% per year and another amendment to cap direct state spending increases, also at 2½% annually. That would put pressure on state aid to municipalities and in turn force cities and towns to make meaningful, structural budget reforms, Cure contends.
For municipal bond investors, he notes the state’s debt report shows that of the $33.8 billion of debt outstanding, only $2.5 billion are state general obligation bonds, which are backed by taxing power of the state. The state constitution limits GO debt based on the operating budget for the year, unless approved by the majority of the voters.
To circumvent the requirement for voter approval to issue GO debt, there’s been a huge expansion debt backed by appropriations, which can rely only on the state’s promise to pay by the legislature. But Cure doesn’t think the legislature will renege on that promise. “The risk of nonappropriation is reduced because funding for a broad range of New Jersey’s capital programs depends on market acceptance of approximately $29 billion of securities backed by general fund appropriates,” he adds.
While that means state-funded issues should be secure, Cure recommends for New Jersey residents a number of essential-service revenue bonds that are not as reliant on the state for funds:
• The New Jersey Turnpike Authority, which operates the Turnpike and the Garden State Parkway. If you travel by car through New Jersey, it’s almost impossible to avoid their tolls.
• The Port Authority of New York and New Jersey. “Near monopolistic control of critical transportation infrastructure,” Cure points out, “including the Hudson River crossing and the three major New York airports, a trend of favorable financial results, large reserve balances and recent toll increases.” That should support the authority’s complex planned capital projects, including redevelopment of the World Trade Center, he adds. (Note: a recent article showing the Port Authority’s bonds as the most expensive municipal credit on which to buy protection in the credit-default swap market was in error. Port Authority bonds trade at a tighter spread, or risk premium, than New Jersey GOs.)
• Higher Education Student Assistance Authority — State of New Jersey Student Loan Revenue bonds. The underlying student loans are strong and overcollateralize the bonds, Cure explains. In addition, there is a debt-service reserve fund and a loan reserve.
• Rutgers University: “Flagship state research university with growing financial resources and strengthened fund-raising profile.”
• New Jersey Environmental Infrastructure Trust: The credit quality of borrowers in the program is strong. Cure says its loan pool could withstand a 45% default rate.
• Princeton University: “Exceptional balance sheet, superb student market position and consistent operating surpluses,” he writes.
• New Jersey Housing and Mortgage Finance Agency — Single-Family Housing Revenue Bonds. Strong financial position, 1.10 to 1 asset-to-debt ratio. Delinquency and foreclosure rates below the state and national Federal Housing Administration rates.
With states across the nation facing deficit crises, they are watching to see if Gov. Christie can force New Jersey to live within its means. And Cure also notes, states also will wait anxiously to see if Christie — a former chief federal law enforcement officer for New Jersey — can challenge the state’s endemic corruption.
If Gov. Christie does succeed in bringing New Jersey’s dysfunctional deficit under control, the significance would exceed that of a thousand Tea Party rallies.
