Don’t borrow in the dark, Governor Christie

June 30, 2011

Every family encounters times when bills are due and they don’t have money. If this happens to a state or local government, they go to the municipal bond market where they can borrow short- or long-term. In the current market they are likely to find a lot of willing lenders.  These lenders will lend at very reasonable interest rates, and the terms of the borrowing will be made public so taxpayers can see what their obligations are.

Since there is so much demand in the muni bond market I was surprised to see that the State of New Jersey was going to set-up a “bridge loan” with J.P. Morgan Chase, one of Wall Street’s biggest banks. The specific details of the borrowing have not been announced, but tidbits released in the media suggest that the lending rate from the bank will be twice the rate from the muni bond markets.

The consumer analogy would be using a neighborhood payday lender rather than taking a cash advance on a credit card. The payday lender would charge you 10% and the credit-card company would charge 5% for the same loan. These are made up examples, but give a glimpse into the most important variable when comparing the state’s borrowing choices.

I know that I’ve been writing a lot about Governor Chris Christie of New Jersey, but he has received so much media attention while other governors, like Andrew Cuomo of New York, have been quietly getting their state’s business done. I think this “bridge loan” is something that they would have preferred to do without media attention.

The Wall Street Journal reported:

State officials are negotiating with J.P. Morgan Chase & Co. over terms for the bridge loan, following a spirited competition for the state’s business, several people familiar with the selection process said.

A bank spokesman declined to comment.

One person familiar with some proposed terms of the possible loan said the interest rate is relatively low, but it could shoot as high as 9% if the state didn’t repay the bank in six months.

The number being quoted in the media is 0.65% for the J.P. Morgan Chase loan. The most recent trade on the New Jersey 2010 bonds that were issued to make up last years shortfall, called tax anticipation notes, were quoted 8 days ago at 0.315% on EMMA, the Municipal Securities Rulemaking Board’s data portal. So the bank lending rate will be about twice the bond market rate.

So it looks like it will be a high borrowing rate and it will be done in the darkness. It is a very large step in the wrong direction for governments to move their borrowing into the darkness. Sunlight is the best disinfectant, and borrowing the municipal bond market ensures sunlight.

I thought I would add a comment from the WSJ that sums up my feeling about this deal:

I find it suspect that a bridge loan of $2.25 billion dollars is required to provide cash flow while the state puts together a bond offering to offer tax anticipation notes to provide cash flow.

Most municipalities and state governments that issue tax anticipation notes are prepared to have them for sale on the first day of the new fiscal year. Accordingly, I would ask why New Jersey needs up to two months to prepare a tax anticipation note bond offering when they apparently do it every year?

New Jersey has already filed the paperwork to issue tax anticipation notes for the 2012 fiscal year. You can see it at Emma here. I want to encourage Governor Christie to bring this borrowing into the light. If it’s critical to have the funds to make the  $500 million pension-fund contribution that you promised before the end of the fiscal year on June 30, then say that. Otherwise this borrowing in the dark is not good for New Jersey.


New Jersey Office of Management and Budget: The Governor’s  FY 2012 Budget  Budget Summary

Self Evident: New Jersey’s Credit Line with JP Morgan

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