Is New Jersey fiscally imploding?

January 3, 2013

The governor of New Jersey, Chris Christie, held a press conference on Wednesday in which he excoriated the U.S. Speaker of the House, John Boehner, and other Republicans for failing to hold a vote on Sandy relief this week. With a tone that is rarely heard in national politics, Christie accused the Congressional leadership of his own party of “duplicity” and “selfishness,” according to The New York Times. Meanwhile, New York governor Andrew Cuomo and New York City Mayor Michael Bloomberg delivered more tempered comments.

Was Christie’s tirade just common speech for Jersey, or are there other pressures on the governor? New Jersey state revenues are far from the projections that Christie’s administration made. Many, including myself and rating agencies, have said Christie’s revenue projections for fiscal year 2013 were overly optimistic given the economic climate. Meanwhile, Christie barnstormed around the state on his “New Jersey Comeback” tour for months until it was clear that the state was not experiencing a jobs boom. State revenues were already weak. Then Sandy flattened many tax and fee streams.

Here is New Jersey’s year to date report (July 1, 2012 – November 30, 2012) from the state treasurer (in $1000’s):

New Jersey revenues are running 5.6% below projections, and the state already has short-term liquidity problems. From a Moody’s November 5, 2012 rating report (emphasis mine):

The state’s liquidity, however, has declined in recent years. Available resources outside the general fund are lower than they have been in advance of any New Jersey note sale in the past five years, and the state’s projected year-end cash balance has also declined substantially from the level anticipated a year ago. This leaves the state a narrow margin for error in the event that projected revenues fall short, or if expenditures escalate. The rating was based on cash-flow projections devised prior to Hurricane Sandy, and the state has not revised its projections since the disaster.

Moody’s issued this report in advance of New Jersey’s short-term borrowing of $2.6 billion from JP Morgan. The Municipal Securities Rulemaking Board shows no trades for the securities, so it appears that JP Morgan did not underwrite these bonds, but simply took them onto its own books. But there is a little problem in the terms of the bonds. Here is the legalese (page 6):

Should revenues be less than anticipated in the State Appropriations Act for Fiscal Year 2013, the Governor may, pursuant to statutory authority, prevent any expenditure under any appropriation, including payment of the Series C Notes.

This means if state revenues don’t equal spending, then Christie must either cut spending or miss a payment to JP Morgan. Of course, JP Morgan could agree to roll this debt at maturity and extend the loan to New Jersey, but the state is heavily indebted already with one of the lowest credit ratings among U.S. states.

More than anything, Christie needs the relief money from Congress to keep his state from going belly up. I don’t doubt that the governor has concerns for shore residents who have lost their homes and possessions. He seems to be a genuine fellow. However, he may be more worried about New Jersey fiscally imploding and the bankers from JP Morgan demanding their $2.6 billion.

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