Corzine vs. The Debt

Fasten your seat belts, New Jersey. There is, says Governor Jon S. Corzine, a “truck barreling down the
road” at us. The state’s bonded debt has soared to roughly $32 billion, the nation’s third highest, and payments on that debt will gobble up $2.6 billion in the fiscal year 2009 budget that might otherwise go to the
infrastructure and services that help make the Garden State a good place to do business.

In January’s State of the State address, Democrat Corzine offered his solution: a four-part financial restructuring plan that would lease operating authority over the New Jersey Turnpike, Garden State Parkway, Atlantic City Expressway and part of Highway 440 in Middlesex County to a new public benefit corporation (PBC). Bonds issued by the PBC would provide the cash to halve the debt and slice a cool billion off that annual debt-service bite. And, oh yes, tolls on those roads would head for the sky—they’d be hiked 50 percent every four years from 2010 to 2022, with additional increases based on the cost of living.

Why not just bill the voters or cut pork? Impossible, said Corzine. “Pigs will fly over the statehouse,” he declared, “before there’s a realistic level of new taxes or spending cuts that can fix this mess.” But his plan did have three other parts: a freeze on state spending for fiscal year 2009, a law that future spending increases can’t exceed recurring revenues and a constitutional amendment requiring voter approval for all future state borrowing without a dedicated revenue source.

Business leaders winced at what an end-to-end Turnpike trip would cost, under the plan, just 14 years from now: $44.10 instead of today’s $6.45, assuming 3 percent annual inflation. As the governor launched a series of 21 town hall meetings to sell his plan, some said his scheme would simply create more debt than ever—albeit in a different pocket. Others suspected that Corzine’s idea for “asset monetization”—squeezing value from future tolls—might be what Winston Churchill called democracy: the worst possible option, except for all the others.

 “It’s like taking out a Visa Platinum to pay off your Amex card,” says Republican State Senator Jennifer Beck of the 12th Legislative District. “It simply replaces one type of debt with another.”

Senator Beck says the plan discriminates against commuters who rely on the toll roads to get to work. She favors budget cuts instead, pointing out that she and her colleagues have identified 70 possible reductions in the last two budgets.

But Michael Egenton, vice president for environment and transportation at the New Jersey Chamber of Commerce, takes a more favorable view of the plan. “What CEO wouldn’t like to see the state keep spending within its means?” he says. “That is how a business operates.”

Behind Egenton’s receptivity, he admits, lies fear. “If this proposal doesn’t go through, I’m afraid Plan B could be more taxes on the business community because they’ve got to raise money from somewhere, and over the years we have been an easy target.”

One CEO who staunchly opposed the idea of selling highways cuts the PBC lease proposal a bit more slack. “Governor Corzine really does know finance,” says Jeffrey Tucker, CEO of the Cherry Hill–based freight brokerage firm Tucker Company, referring to the governor’s experience as a former co-chairman of the investment bank Goldman Sachs.

Tucker does oppose putting tolls on part of Highway 440, which is currently free. (The governor has said this part of his plan might be negotiable.) But he is pleased that proceeds from the bonds issued by the new PBC would be used only for cutting the debt and funding transportation improvements.

“Most of the trucking and manufacturing companies wouldn’t mind paying a little extra on tolls if we knew for darn sure that money was going back into the roads,” says Tucker.

So what’s in store? NJ CEO sought answers in three key areas:

Finances: a Novel Arrangement
Skeptics had initial questions the state’s Treasury Department couldn’t immediately answer. What firm (Goldman Sachs?) would underwrite the new PBC bonds? Whoever it is, says Senator Beck, “they stand to make an enormous amount of money off their fees. I’ll be curious to see what those numbers are.” At one town meeting Corzine estimated that underwriting and legal fees would run about 1 percent of the PBC’s total funding—a hefty sum.

“Moving debt from New Jersey’s state balance sheet to some new agency’s balance sheet doesn’t pay off anything,” says Doug Stives, a CPA and professor of accounting and income taxes at Monmouth University.

But Corzine’s contention that “PBC debt is not state debt” does get support (predictably, says Senator Beck) from financial experts. Mark Tenenhaus, a vice president at Moody’s Investors Service who serves on the committee that determines the state’s credit rating, says the governor’s scheme is not simply like using one credit card to pay off another.

“It does address the major issues that confront the state’s fiscal condition,” he asserts.

The governor says he expects bonds issued by the PBC to raise between $32 and $38 billion. Of that, $10 billion would be used to pay off existing obligations on toll roads and “create the appropriate bond reserves,” and $4 billion would be placed in a capital reserve for toll-road improvements and widenings. The remaining $18 to $24 billion would provide “an upfront payment … to reduce state debt and fund transportation improvements.”

The Internal Revenue Service was expected to rule on whether tax-exempt bonds could be used. But even if they can, Tenenhaus expects that taxable bonds, too, must be part of the mix. “It’s difficult to envision a tax-
exempt bond market being able to absorb that many bonds in basically one shot,” he says.

At least everyone agrees the problem is severe. Debt service eats up 7 percent of the state’s annual budget—and that share grows ominously. And the state’s Transportation Trust Fund is due to run out of revenues in 2011. “If we don’t have a consistent funding source for the TTF,” warns Egenton, “it will jeopardize federal matching funds for projects like the proposed Hudson River commuter rail tunnel.”

Politics: A Canny Approach
Corzine’s recent success in passing legislation to reform school financing “augurs well for this effort,” says Gerald Pomper, a retired political science professor at Rutgers University. “The main thing he has going for him is sheer necessity.”
 
Indisputably the Corzine plan would affect some New Jerseyans more than others. The
governor acknowledged this when he told reporters that regular-rider discounts might ease commuters’ burden to some extent.

Pomper says it was “very smart” of Corzine to tap his friend and onetime Senate opponent, former Republican Congressman Bob Franks, to lead the public campaign for legislative enactment of the plan. “Franks provides cover for some Republicans who might be persuaded anyway but need protection politically,” he observes.

Sacrifice makes stirring political rhetoric, to be sure. But a wise politician invokes the noble sentiments of sacrifice and then cushions the pain. That Corzine has done in two ways: by getting out-of-staters to help bail out New Jersey and by postponing the “tough love” at the toll booth till after the 2009 gubernatorial election.

An estimated 53 percent of Turnpike users and 33 percent of Parkway users are non–New Jerseyans. But passing the hat to out-of-staters is hardly a new idea.

“Look at Delaware,” says Matt Sundeen, a transportation analyst for the National Conference of State Legislatures. “It has a very small number of miles of I-95, but there are tolls there. Most of the people they’re tolling are from elsewhere, and it’s significant revenue for Delaware.” In a way, he adds, New Jersey is lucky to have a stream of tollable travelers passing through. “That gives it much more potential for solving transportation funding issues than, say, South Dakota.”

Corzine has vowed to put his job on the line to solve the state’s fiscal crisis. But the fact that the toll hikes don’t begin till 2010 may leave the worst of the voters’ wrath till he’s safely re-elected.

“I’d support raising tolls but only if he does it now,” says Stives. “Waiting is political hyprocrisy.”

But it doesn’t bother Pomper that voters won’t get an opportunity to render a direct verdict on the plan. “The defeat of the proposition last fall to reserve 1 cent of the sales tax for property tax relief indicates that voters are saying, ‘What do you guys get elected for? You figure it out,’” he says.

The battle for financial restructuring tests the political skills of a chief executive known more for crunching numbers than for slapping backs. “It’s not going to be easy,” says Pomper. “The governor is the state’s most powerful person, but he doesn’t get everything he wants. And this governor has not always been skilled at getting support. He hasn’t spent a lot of time schmoozing.”

Infrastructure: A Pressing Need
Last August 1, when the collapse of Minneapolis’s I-35W bridge plunged dozens of cars and their occupants into the Mississippi, New Jersey and the nation got a reminder that infrastructure maintenance and repair can be a life-or-death affair.

“In the next 10 years, we have over 10,000 miles of highways that need to be resurfaced,” said Corzine. “We have 700 deficient bridges that need repairs, and we shouldn’t wait for a tragedy to motivate us to fix them.”

Repairs and improvements to highway systems are traditionally funded by gasoline taxes. But this year, with soaring oil prices causing pain at the pump for drivers also squeezed by the mortgage crisis, a major gas-tax increase may be untouchable—even though New Jersey’s gas tax is among the nation’s lowest.

Analyst Sundeen has studied the response of many cash-strapped states to the challenge of financing infrastructure improvements. He says it’s a new wrinkle that the Corzine plan “is using transportation dollars to solve larger debt concerns.”

Highway monetization itself is rather new in the United States, he adds. “The first time it was done here was when they sold for $1.8 billion the rights to operate the Chicago Skyway for 99 years. The next year, lawmakers in Indiana authorized a sale for $3.8 billion of rights to operate the Indiana Toll Road over 75 years.”

These arrangements have drawn criticism, but the analyst explains that they differ from the Corzine plan because they leased tolling authority to a private Spanish-Australian business entity. As Tenenhaus of Moody’s notes, Corzine is “adamant” that there be “no dividend payouts to anybody outside New Jersey.”

Sundeen believes the Corzine plan may have “some direct cost impact on businesses that use the toll highways.” But he adds that “it’s beneficial to companies when a government is solvent and paying off its debt so that funding is predictable and the state can do more business.” And an efficient, up-to-date and uncongested transportation system, he adds, is a key business asset too.

“Time is money,” says Sundeen. “If you ship your product and it’s sitting in traffic and not moving, that’s part of the cost of doing business.”

New Jersey’s highway tolls are currently modest compared with those of many states. And Tenenhaus doesn’t think enactment of the governor’s plan would be a deal-breaker for businesses thinking of locating in New Jersey.

“There are a host of reasons to be here, given the education levels, the market, the ports and everything that goes with them,” he says. “And the plan would deal with the state’s fiscal capacity and help fund infrastructure improvements like widening the Turnpike, all to the betterment of business.”

Whatever the fate of the governor’s proposal, it’s widely agreed that something must be done about that figurative truck he sees barreling down the road in our direction.

“It should have been stopped long ago, that truck,” Corzine declared. “But instead, it’s just picking up speed.”