Christie Highway Debt Exceeds Plan by 18% on Revenue Gap
New Jersey Governor Chris Christie, who pledged to reduce state bonding, hasn’t been able to keep a vow to curb borrowing for roads and bridges. Investors in the $3.7 trillion municipal market welcome the extra debt.
The New Jersey Transportation Trust Fund Authority, which finances roads, bridges and mass-transit, borrowed about $878 million today as transit-related munis with a similar credit grade are set to outperform for the longest stretch since 2008.
In the two years through June, the fund is set to issue $2.56 billion of debt for capital projects, 18 percent more than the first-term Republican governor had planned. The state’s revenue collections have trailed projections, leading Christie to lower allocations to the fund and borrow instead. Still, investors are focusing on the sale’s relatively higher yields, said Matt Dalton at Belle Haven Investments Inc. in White Plains, New York.
“This deal feeds right into demand” for securities rated A, said Dalton, who helps manage $1.5 billion of munis.
Christie, 50, is back on track to limit the fund’s borrowing, as originally planned, for the fiscal year beginning July 1, Andrew Sidamon-Eristoff, the state’s treasurer, has said. The governor, who is up for re-election this year, is also reviving his proposal for a 10 percent tax cut that Democrats in the legislature had blocked.
“The Christie administration is exercising fiscal responsibility” in fiscal 2014 “by supporting $1.6 billion of road and mass transit projects around the state with less than $850 million in new borrowings” by the Transportation Trust Fund agency, William Quinn, a spokesman for Sidamon-Eristoff, said via e-mail.
Michael Drewniak, Christie’s spokesman, referred to testimony Commissioner of Transportation James Simpson made to lawmakers this month in which he said the state has returned to Christie’s blueprint.
Investors have been seeking munis rated four to six steps below top-rated securities for their higher yields as interest rates remain below historical averages. The transportation fund’s A+ rating, Standard & Poor’s fifth-highest, falls in that range. Twenty-year general-obligation bonds yielded 3.93 percent last week, below a 52-year average of 5.88 percent, according to a Bond Buyer index.
“That’s the holy grail,” said Howard Cure, director of muni research in New York at Evercore Wealth Management LLC, which manages about $4.5 billion. “Just a basic A rated credit would get a little more yield, but far enough away from potentials for having real fiscal problems,” as credits in the triple-B range may face, he said.
Single-A transport bonds have earned 1.3 percent in 2013 through April 12, beating the 1.2 percent gain for the broader market, according to Bank of America Merrill Lynch data. It would be the third straight year for the transport debt to beat the market.
The New Jersey trust refunding deal is backed by revenue appropriated by the legislature every year from the state’s 10.5-cent per gallon gasoline tax.
Investors have several transportation deals to choose from this week, data compiled by Bloomberg show. The New Jersey Turnpike Authority, which oversees the highway, plans to sell $780 million today; Pennsylvania Turnpike Commission is set to borrow $175 million; and Illinois State Toll Highway Authority plans to issue $500 million.
The extra yield investors demand to buy transportation debt rated A+, four levels below benchmark munis, is about 0.7 percentage point above top-rated debt, 18 percent below the three-year average, Bloomberg data show.
Tax-exempt trust fund bonds due in June 2024, the longest maturity, priced with an initial yield of 2.6 percent, or 0.67 percentage point above benchmark munis, data compiled by Bloomberg show. That spread is similar to when the authority sold in December.
The state may miss revenue forecasts by as much as $302 million in the current budget and $335 million next fiscal year, David Rosen of the nonpartisan Office of Legislative Services told lawmakers April 4.
Christie announced an $8 billion transportation plan in January 2011 that would support the fund for another five years. The program was scheduled to run out of money in fiscal 2012 as the full $895 million it collects from the state’s gasoline tax was needed to repay principal and interest payments.
The central thrust of the plan was ending the traditional reliance on municipal bonds as the primary source of roads funding and moving toward a larger cash component, or so-called pay-go financing. The plan was designed to provide $1.6 billion annually to roadwork and included $672 million for New Jersey Transit and $200 million for local-government projects.
“What you have here is a plan that is fiscally responsible, that will not burden over the long haul our children and grandchildren with extraordinary debt payments,” Christie told reporters in 2011.
Christie proposed a combined $4.4 billion in borrowing for transportation over five years, starting with $1.2 billion in fiscal 2012 and then declining each year.
To get back on track next fiscal year, the administration has proposed using $250 million raised through prior bond sales at a premium, while also accelerating federally funded road projects. Those moves will allow the state to keep to the initial plan without extra borrowing, said Quinn, the treasurer’s spokesman.
The additional bonding for this year and last shows the budget limitations at the state level are making it difficult for New Jersey to finance more road and bridge work with cash rather than debt, said Baye Larsen, a Moody’s Investors Service analyst.
“The relatively small change in their pay-go plans in and of themselves are not a material credit driver,” Larsen said in an interview. “But they are one more indication of changes that the state is having to make to address its overall budget pressures.”
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