Christie Budget Nears Approval as Financing Worsens: Muni Credit
New Jersey and its localities are paying the biggest yield penalty on their debt since October as lawmakers prepare to vote on a budget that increases reliance on one-time revenue.
The Legislature plans to decide today on a $31.7 billion package that includes almost $1.9 billion of non-recurring revenue measures proposed by Republican Governor Chris Christie. That figure is almost 6 percent of the budget, up from 4 percent this year. Standard & Poor’s in February called the plan unbalanced and dependent on “optimistic” economic forecasts.
Investors typically prefer states and cities to plan their finances using repeating revenue streams rather than one-off fixes. Bondholders demanded as much as 0.52 percentage point of extra yield above top-rated tax-exempts this month to hold 10- year general obligations of New Jersey and its municipalities, the most since October, data compiled by Bloomberg show.
“New Jersey is certainly one of the states we’re worried about,” said Robert DiMella, who helps oversee $5 billion of munis, including New Jersey debt, at MacKay Municipal Managers in Princeton, New Jersey. “They have significant structural imbalances that they need to continue to work on. One-off type of measures in the budget procedure are not helpful.”
From California to Florida, legislators are looking to one- time revenue to help close at least $40 billion of combined state budget deficits in the fiscal year starting in July, according to the National Governors Association. That follows $500 billion of shortfalls filled in the past four years, according to the National Conference of State Legislatures.
New York City’s proposed $68.7 billion budget for the year starting July 1 would use $3.5 billion of one-time revenue, including money from a plan to sell taxi medallions. Florida closed a hole this year with $33.4 million from a settlement with banks that ended a probe into abuses stemming from the housing collapse.
California Democrats are also using some of the settlement for their spending plan, which plugs a $15.7 billion deficit. The yield spread on 10-year debt of California issuers is at a two-month high, according to data compiled by Bloomberg.
In New Jersey, the current spread is double the five-year average, data compiled by Bloomberg show. Since Christie took office in January 2010, the spread’s widest point was July of last year as Christie vetoed almost $1 billion of spending.
“As the budget talks start to become front-page news, spreads seem to widen in June,” Andrew Pratt, a spokesman for Treasurer Andrew Sidamon-Eristoff, said in an interview. “A lot of this is uncertainty over whether a budget will be passed and what it will contain.”
Christie’s 7.3 percent anticipated revenue growth is the biggest of any U.S. governor and the most since before the 18- month recession began in December 2007.
“We’re skeptical” of New Jersey’s fiscal outlook, said Adam Weigold, who helps oversee $1.2 billion of munis, including $400 million in four New Jersey funds, as portfolio manager at Boston-based Eaton Vance Corp. “There are some ambitious revenue projections in the budget, and the use of one-time revenue fillers is not a positive and not really the way we want to see you balance your budget.”
The use of one-time revenue is lower than when Christie took office. The share was 13 percent in fiscal 2010, the final year of Democrat Jon Corzine’s administration. It fell to 6 percent in fiscal 2011, Christie’s first budget, then to 4 percent for fiscal 2012, before rising in the current proposal.
“This administration relies on fewer one-shots than most of the budgets passed by previous administrations over the eight years preceding the governor taking office,” Pratt said.
Since the governor proposed the fiscal 2013 plan in February, revenue has fallen short of projections. His treasurer has estimated collections through June 2013 may be $700 million under target, while the Legislature’s chief budget analyst has said the gap may be double that.
The administration’s proposed plugs include diverting $279 million over two years from a fund that invests in renewable energy programs. He’s also opted to cancel $260 million in cash funding for roadwork and bank the money as revenue, while borrowing to finish the work. The steps mean Christie, 49, who faces re-election next year, didn’t have to break a promise to cut taxes. He has argued with Democrats, whose budget includes a tax-credit plan subject to revenue growth.
The governor told reporters in Atlantic City in May that the change in the road-bonding plan was needed to compensate for an unexpected dip in energy-tax revenue after the warmest 12- month period on record.
“We’re making a change in one year in order to make sure we keep our promises to the people of this state that it’s time for them to have their taxes cut,” Christie said. “I’m not going to allow a one-time occurrence like a warm winter prevent our ability to cut taxes.”
S&P rates the state AA-, fourth-highest, with a stable outlook. New Jersey debt has earned 4.5 percent this year, beating the 4 percent return for the $3.7 trillion municipal market, S&P data show.
“We as a general rule don’t think the securities are priced cheap enough for people to have a substantial position in New Jersey paper,” said DiMella. “New Jersey residents should be more positioned in national-type of paper” and wait for yields to rise when the state sells more debt, he said.
Residents may get to vote on new bonds later this year. The Legislature is working on a $750 million general-obligation bond referendum that if approved would go before voters in November. The proceeds are slated to build academic facilities such as classrooms and labs. It’d be the state’s first general- obligation sale for college construction since 1988.
Following are pending sales:
WASHINGTON HEALTH CARE FACILITIES AUTHORITY is set to issue $625 million of revenue bonds as soon as June 27. Proceeds will help refund debt of Providence Health & Services, a nonprofit corporation with facilities in Washington, Oregon, Montana, Alaska and California, according to bond documents. Moody’s Investors Service rates the deal Aa2, third-highest, with a negative outlook. (Added June 25)
The LONG ISLAND POWER AUTHORITY plans to issue $500 million of tax-exempt revenue bonds as soon as this week, according to data compiled by Bloomberg. Proceeds will be used for capital projects and to refund debt. (Updated June 22)
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