In a previous article, I suggested that New Jersey is poorly planning and budgeting for its capital investments. It follows an ad hoc process whereby the state makes decisions based on the case of the day. Someday it’s $ 300 million for State House renovations; another day is water projects and another day is vocational and community colleges and K-12 safety projects.
I recommended that the state reinvigorate its existing Capital Planning and Budgeting Commission as a vehicle to orchestrate a meaningful process so that future bond approvals and other capital investments are undertaken in a systematic and planned environment. .
Nothing is easy in the world of public finances, so some clarification on the debt is in order. The total amount of government bond debt funded by government revenues as of June 30, 2017 – the last year of audited government records – is $ 35 billion. In addition, there are debt obligations that are not funded by government revenues, such as tobacco settlement bonds and other unamortized bond premiums; these total $ 11 billion and have no impact on taxpayers. There are unsecured obligations, including net pension liabilities and retirement health obligations; these total $ 155 billion. These costs are of concern to taxpayers and are reflected in the budget, but do not constitute bond debt.
NJ’s debt, the big picture
Debt is often seen as an undesirable aspect of public finances, but, used correctly, it is an important means of financing large projects that have high initial costs and long-term benefits. Bond debt, like a home loan, spreads costs over time to better match the flow of benefits.
The New Jersey Constitution states that any debt representing 1% of the state’s total ownership must be submitted and approved by a majority of voters in a general election. In addition, any money raised by the issuance of the debt must only be allocated to the precise object stated in the referendum; and the constitution restricts long-term debt only for investment purposes, such as roads, sewers, water facilities, prisons, school buildings.
For a number of years, with favorable interpretations from the Supreme Court, other mechanisms, including appropriation debt, were approved for debt issuance without voter approval. Let’s take a quick look at the debt situation.
Long-term debt
New Jersey long-term bond debt consists of three main types:
(1)General obligations (GO) issued by the state government and approved by voters;
(2)Appropriation debt (sometimes called contractual debt) issued by certain special authorities created by the state – without the approval of the voters (e.g. State Building Authority and State Economic Development Authority) and which are funded under contract with the state which provides the state revenue to pay debt service;
(3)Restricted debt supported by dedicated income – think Transportation Trust Fund) – issued without voter approval, although voters approved the allocation of gasoline revenues to support these bonds.
Total bond debt as of June 30, 2017 is $ 35 billion. GO’s debt is $ 2 billion. The earmarked debt is $ 33 billion – $ 15.6 billion funded from general government revenue and $ 17.4 billion funded from dedicated revenue, primarily the gasoline tax.
General obligation debt is approved by voters, while earmarked debt is usually only approved by the legislature and governor, without the need for voter approval. GO Debt has the full faith and credit of the taxing power of the State, while Appropriation Debt is subject to annual allocations by the Legislature. Wall Street and the investment community view GO’s debt as safer since the legislature may decide – although it never has – not to allocate funds for appropriation debt while GO’s debt has a constitutional guarantee.
One could write an entire thesis on the origin and advancement of appropriation debt, but suffice it to say that the bulk of New Jersey debt (94%) has been approved by this method. In short, dating back to the 1970s, the state created several authorities (determined by the Supreme Court as not being the state government) to issue debt without the approval of the voters. New Jersey isn’t alone in creating this device for issuing debt, but most people would agree that it was done to avoid voter approval.
Where was the bond money spent?
Seventy-one percent of all debts were issued for the construction of local schools ($ 9.7 billion) or for transportation projects ($ 15 billion). A myriad of lower amounts have been authorized for the acquisition of open spaces, higher education institutions, water supply, sewage construction and public buildings.
When the government sells bonds, it commits to paying the debt service annually. This principal and interest is in the annual state budget, and for the proposed budget for fiscal year 2019, it amounts to $ 4.2 billion, or 11% of the state budget. Most rating agencies and other public finances consider such a percentage to be very high.
Short term debt
Since 1991, the government has issued “tax and revenue anticipation notes” annually to finance time imbalances in annual budget cash flows. These are necessary because tax revenues tend to increase in December-April as final income and corporate tax returns are received, but the expenses are spread more evenly throughout the course of the year. ‘year. All of these notes mature before the end of the year; therefore, the government never has a debt to pay on the balance sheet at the end of the year. This is an excellent discipline, as many states roll over this debt the following year. In fiscal year 2017, the state issued $ 1.7 billion worth of these notes; in some years borrowings have reached $ 2.6 billion.
Conclusion
Most of the debts have gone to critical projects – building schools, water and sewers, acquiring open spaces, road and transit projects – worthy projects and clearly of a capital nature. Unfortunately, in three cases, the state issued debt primarily to balance the budget rather than raising taxes or cutting programs, including issuing bonds for the payment of pensions.
Issuing debt securities is essential for investing in necessary infrastructure improvements. According to a 2017 report by the American Society of Civil Engineers, New Jersey’s infrastructure can be characterized from daunting to alarming. The State received an overall rating of D +, with ratings ranging from a high level of B- for solid waste to D- for transit.
Additionally, the need for additional funding has been estimated by the State Fiscal Crisis Task Force, a group co-chaired by former Fed President Paul Volcker, at $ 135 billion and growing.
Recent increases in the gasoline tax will help finance transportation needs, but significant needs have been identified for potable water, wastewater treatment, stormwater management, buildings and dams. These projects cannot be ignored, but New Jersey must use a viable long-term capital planning and budgeting process to meet these growing needs. Should we be selling more bonds for the $ 135 billion – but how do we plan that?
