Insuring Christie Makes N.J. Inferior Performer in Bond Market
Governor Chris Christie’s pledge to erase New Jersey’s budget deficit by disparaging public-worker unions has helped make him a national Republican star. Those who buy the state’s bonds are less impressed.
While the 48-year-old former prosecutor who denied Jon Corzine a second term in 2009 says he has made New Jersey a “national model,” the cost to insure its debt exceeds every state except Nevada, Illinois and California in the credit- default swaps market, according to pricing data compiled by CMA. Protecting $10 million of New Jersey bonds against default for five years took $149,000 annually yesterday, trailing California by about $77,000 and Illinois by $67,000 among 16 states tracked by the London-based firm.
“In most places you’re not going to get much value from saying what you’re going to do,” said Christopher Mier, chief municipal strategist at Chicago-based Loop Capital Markets LLC, the lead underwriter of $468.3 million of municipal bonds this year. “Investors respond to more quiet efficiency.”
Individual investors began fleeing the $2.93 trillion municipal-bond market last year as government deficits mounted and Meredith Whitney, the bank analyst, predicted an unprecedented “hundreds of billions” of defaults in 2011. While the forecast lacked any supporting evidence and is considered implausible within the industry, through April 6 there were 21 straight weeks of net withdrawals from U.S. mutual funds that invest in the debt, totaling about $30.8 billion, including a record $4 billion for the week ended Jan. 19, according to Lipper US Fund Flows.
New York Swaps
Unlike New Jersey investors, New York bondholders were rewarded in the credit-default swaps market as the state balanced its budget. The cost to insure $10 million of New York bonds against default fell to $98,700 a year for five years yesterday, below a municipal market index at about $150,200, after Governor Andrew Cuomo, a Democrat, and lawmakers in Albany last month closed a $10 billion deficit with $9.3 billion of cuts and no new taxes. The state’s fiscal year began April 1.
New Jersey faces a $10.5 billion deficit in fiscal 2012, which at about 37 percent of its current budget is the second worst among states, according to the Center on Budget and Policy Priorities. The Washington, D.C.-based nonprofit organization focuses on issues that affect lower-income Americans.
The rates for both New York and New Jersey credit-default swaps reached highs this year on Jan. 10, with New York at about $220,500 a year to protect a $10 million investment for five years and New Jersey at $223,000, according to CMA, a data provider owned by CME Group Inc. (CME) that compiles credit-swap prices from hedge funds and other clients. The rates for both states were roughly equal throughout 2010 and 2009.
“New Jersey has more than $32 billion in debt, so it’s not surprising that a credit-default market exists on its bonds,” said Andrew Pratt, a spokesman for Treasurer Andrew P. Sidamon- Eristoff, in an e-mail. “New Jersey has always met its obligations, and it is constitutionally obligated to keep its budget balanced. History suggests that it’s unwise to bet that New Jersey will not make its debt payments.”
Credit-default swaps are a type of derivative used by banks and institutional investors to protect against nonpayment of debt or to speculate on changes in credit quality. California Treasurer Bill Lockyer said in September he wants regulators to prohibit the swaps on municipal bonds because of concern that they may be used to manipulate the market and cost state taxpayers. California’s five-year rate to insure $10 million of bonds was almost $226,000 yesterday, according to CMA data.
In Illinois, the five-year protection cost for $10 million in state bonds fell as much as 42 percent from a 2011 high of $358,000 a year on Jan. 6, after Governor Pat Quinn, a Democrat, reached a deal with lawmakers in January to raise the state’s income tax to 5 percent from 3 percent to help close a $13 billion deficit. The rate rose to almost $216,000 yesterday, data from CMA indicate.
“Christie’s got his own battles going on with the unions,” said Scott Albrecht, a senior vice president at Federated Investors in Pittsburgh who manages $1 billion in municipal debt. “That’s not a credit positive.”
While Christie excluded part-time workers from state pensions, increased teacher contributions to pay for health care and canceled a $3 billion federal grant when he scuttled an $8.7 billion commuter-rail tunnel to New York, his attempts to rein in government spending have failed to bolster the state’s financial strength, according to BMO Capital Markets in Chicago. The investment bank this month ranked New Jersey the fifth- lowest state on its monthly financial-strength index, just ahead of Illinois.
New Jersey Budget
The governor’s $29.4 billion spending plan, passed last year, cut $820 million in school aid and $445 million for municipalities, while suspending almost $850 million in property-tax rebates and deferring a $3 billion pension contribution. His proposed budget for the year that begins in July holds spending level. Christie also wants to roll back a 9 percent raise in pension benefits since 2001 and halt inflation- based payment increases.
The state’s credit rating was downgraded one level in February to AA- by Standard & Poor’s after the pension contribution was delayed while Christie pressed for reforms of the system. Moody’s Investors Service threatened to do the same. Moody’s grades Illinois debt A1, two levels lower than New Jersey, at Aa2.
The extra yield investors demand to hold New Jersey’s 10- year general-obligation debt reached 64 basis points, or 0.64 percentage point, compared with the average AAA tax-exempt rate for similar maturities on Sept. 9, the widest since at least November 1994. The difference, or spread, began widening when Christie took office. It stood at 14 basis points yesterday, about twice the four-year average under Democrat Corzine. Since January 2010, the spread has averaged about 40 basis points.
“We’re kind of used to politicians posturing,” said Ed Reinoso, who manages $300 million as chief executive officer of Castleton Partners LLC in New York. “We don’t dismiss it completely. It’s that there’s usually a political agenda.”
The state’s Transportation Trust Fund Authority, New Jersey’s main financing agency for roadwork, plans to issue as much as $600 million in 30-year securities next month, bringing its outstanding debt to $12.4 billion, according to the authority’s website. The agency uses all its $895 million in annual revenue from fuels taxes to pay debt service.
Bond Offering Cut
The New Jersey Economic Development Authority reduced a bond offering by almost 50 percent to $712.3 million, on Jan. 13, citing “market conditions” as tax-exempt yields on most maturities of municipal debt climbed. On the same day, the governor said that health-care costs “will bankrupt” the state unless it requires workers to pay more for their insurance.
Michael Drewniak, a Christie spokesman, said at the time that the bond-sale cut wasn’t connected to the governor’s comments. On April 12, he referred questions about the governor’s handling of budget matters and the state’s higher credit costs to Pratt, the treasury spokesman.
Christie’s political profile began rising last year as he declared a fiscal emergency in order to close a $2.2 billion deficit, inherited from Corzine. Christie immediately began attacking wages and benefits paid to government workers, helping convince voters to reject budgets in school districts where unions resisted wage freezes. A record 59 percent were defeated.
“I wasn’t sent here to make people happy,” the governor said to applause at a town-hall style meeting on March 15 in Woodbridge, New Jersey. “I was sent here to get the state back in shape.”
Christie broke with tradition by not reappointing Justice John E. Wallace Jr., the only black on the New Jersey Supreme Court, when his term ended in May. Senate President Stephen Sweeney has said he won’t hold confirmation hearings on Anne Murray Patterson, a Republican lawyer who Christie nominated to replace Wallace.
The state’s highest court is currently debating whether Christie unlawfully cut school aid last year. A study filed in the case last month said the poorest districts were hurt most and had been underfunded by $1.6 billion.
The state last year failed to win a $400 million Race to the Top education grant from the federal government because of a clerical error. Bret Schundler, the education commissioner subsequently fired by Christie, said the mistake stemmed in part from the governor’s unwillingness to work with teacher unions on the application.
The governor’s battles have resonated with registered voters, as 51 percent said they approved of the way Christie is handling his job, according to a Fairleigh Dickinson University poll released April 6. That was up from 43 percent about a year earlier. His disapproval rating climbed to 41 percent from 32 percent in the same period, the survey said.
Christie tied for third among potential Republican presidential nominees in a straw poll conducted by the Conservative Political Action Conference in February. Last month, he told the National Review in an interview posted on the biweekly magazine’s website that he could win the presidency even as he insisted he wouldn’t run in 2012.
“He can say a number of things and we’re going to say, ‘Great, I hope that’s true,’” said Matthew Buscone, who manages state and local government investing at Breckinridge Capital Advisors Inc. in Boston. The company oversees $12 billion in assets.
“It’s hard to make a trade on the rhetoric,” he said.
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