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Christie Voter Win Replicated With Investors: Muni Credit

Governor Chris Christie
Governor Chris Christie, a potential 2016 candidate for president, has said that rebuilding from Sandy will determine whether he wins a second term as governor in November. Photographer: Daniel Acker/Bloomberg

Governor Chris Christie’s post-Hurricane Sandy leadership has won over New Jersey voters as he heads toward re-election. Now he’s gaining fans in the $3.7 trillion municipal-bond market.

The state’s relative borrowing costs have shrunk 70 percent since the Republican took office in 2010, according to data compiled by Bloomberg. Barclays Plc data show its securities are beating those of nearby New York and Connecticut. Christie, 50, has won legislative approval to overhaul government-worker pensions and benefits, and earned praise for his handling of the Oct. 29 storm, which he has said will cost $36.9 billion to repair and prevent future damage.

Christie, a potential 2016 candidate for president, has said that rebuilding from Sandy will determine whether he wins a second term as governor in November. He led his Democratic challenger, state Senator Barbara Buono, by 28 percentage points in a Quinnipiac University poll released yesterday, with support from almost a third of the voters in the opposing party.

“Investors see somebody who has a handle on the problems,” said Jamie Iselin, who helps manage $9 billion of munis, including New Jersey debt, at Neuberger Berman Group LLC in New York. “And through his ability to articulate them and his political skills, has been able to begin the process of addressing the challenges that the state faces.”

Beating Neighbors

“He’s really somebody at the forefront of doing that and that has inspired confidence in investors,” Iselin said.

Since Christie took office on Jan. 19, 2010, debt sold by New Jersey issuers has earned an annualized rate of 4.24 percent, more than 3.83 percent for New York and 3.07 percent for Connecticut, according to Barclays data. The broader municipal market has gained 4.22 percent.

In New Jersey, tax revenue is increasing every year under Christie, though at a slower pace than he had anticipated. The state will collect a record $32.8 billion in the fiscal year ending June 30, 2014, according to the governor’s projections.

For the year ended June 30, Christie had to revise revenue forecasts as collections fell short. He initially proposed revenue of $31.7 billion and lowered that to $31.3 billion and again to $31.2 billion.

‘Too Aggressive’

Standard & Poor’s has had a negative outlook on New Jersey’s debt since September because of doubts about Christie’s projections.

“They’ve probably been a little too aggressive in forecasting revenue growth and that kind of hurt them with the rating agencies,” said Paul Brennan, who helps manage $90 billion of munis, including $1 billion in New Jersey-focused mutual funds, at Chicago-based Nuveen Asset Management.

The major credit-rating companies each lowered New Jersey’s grade by one level since Christie took office, ranking the state three steps below top-rated munis. Moody’s Investors Service and S&P assess New York one level higher. S&P grades Connecticut one step above New Jersey.

Investors have purchased lower-rated securities for their higher relative yields after interest rates fell to historic lows at the end of 2012, which has helped New Jersey earn more than its neighbors, Brennan said. While yields on 20-year general-obligation bonds jumped to 4.77 percent last month, the highest since April 2011, the interest rate is still below a 52-year average of 5.88 percent, according to a Bond Buyer index.

Less Yield

New Jersey has “performed better on a relative basis because of the compressing yield premiums, which has pushed the bonds to perform even better relative to those other borrowers,” Brennan said.

Investors are demanding less additional yield to buy the state’s debt.

New Jersey last sold general-obligation bonds on May 1, with 10-year debt priced at a 1.89 percent yield, 0.1 percentage point more than benchmark munis, Bloomberg data show. That’s down from a yield difference of 0.35 percentage point on 10-year general-obligation bonds that priced Dec. 8, 2009, the last such deal before Christie took office.

“Governor Christie’s pension reforms and budget discipline have given investors greater confidence in New Jersey’s long-term economic prospects,” William Quinn, spokesman for Treasurer Andrew Sidamon-Eristoff, said in an e-mail.

Pension Woes

New Jersey’s 2012 per-capita income of $53,628 was third among U.S. states behind Connecticut and Massachusetts, Commerce Department data show. Yet the state faces high retirement obligations and debt levels.

Its net pension liabilities total $63.2 billion, the fifth-highest, and represent 137 percent of governmental revenue, according to Moody’s. Gross tax-supported debt of $41.6 billion is third-highest, according to the ratings company.

Yet Christie, like Democratic Governor Jerry Brown in California, has slowed the pace of borrowing after New Jersey debt more than doubled over a decade under the Republican’s predecessors. The rate of growth was 1.94 percent in fiscal 2012, the lowest since fiscal 2007, according to Quinn.

This year, New Jersey and its issuers are fourth in borrowing among states, after California, Texas and New York, Bloomberg data show.

New Jersey’s borrowing plans for this year include $849 million in Transportation Trust Fund Authority bonds later this month and $375 million in Building Authority debt in November, according to Quinn.

Jobless Challenge

New Jersey tied with Michigan for the sixth-highest jobless rate, at 8.7 percent in June. While that is down from 9.7 percent the month before Christie took office, it is 1.1 percentage point above June’s national rate and higher than neighboring New York, Connecticut and Pennsylvania.

“Pressures still remain because they haven’t had as much success growing the economy” as other states have, Brennan said.

In the week ahead, California is set to sell $5.5 billion of notes, the year’s biggest short-term municipal borrowing.

In the long-term market, the Dormitory Authority of the State of New York leads issuers selling about $4 billion.

The local governments are selling with yields on benchmark 10-year munis close to the highest this month. At 2.89 percent, the interest rate compares with about 2.59 percent for similar-maturity Treasuries.

The ratio of the two yields, a gauge of relative value, is about 112 percent, compared with an average of 93 percent since 2001. The higher the figure, the cheaper munis are compared with their federal counterparts.

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