Questions about the Port Authority’s toll hike

The New York Times has chronicled the SEC’s investigation into whether New Jersey Governor Chris Christie forced the New York/New Jersey Port Authority to pay for $1.8 billion in improvements to the Pulaski skyway without properly disclosing it to bondholders. Allegedly, Christie’s rationale was that the Pulaski was an “access” road leading to a Port Authority tunnel. It appears that Christie’s Port Authority lieutenants were scheming to radically raise tolls to pay for it.

The New Jersey Record reported (emphasis mine):

Years before they resigned amid a scandal over politically motivated lane closures at the George Washington Bridge, Governor Christie’s top two executives at the Port Authority led a secretive campaign to quickly push through controversial toll hikes on the Hudson River bridges and tunnels by drowning out criticism, limiting public input and portraying the governors of New York and New Jersey as fiscal hawks who reined in an out-of-control agency.

At its heart was a plan to have the Port Authority, an independent bi-state agency, propose an enormous toll hike — a $6 increase that would bring the E-Z Pass toll to $14 by 2014 — so that the governors could then scale it back. The smaller increases that were ultimately approved in 2011 — $4.50 over four years — allowed both governors to claim credit while they set the stage for each state to claim hundreds of millions of dollars to fund pet projects not directly related to the Port Authority.

It was $1.8 billion that was siphoned away from the Port Authority to pay for New Jersey roads.

Christie needed Port Authority funds because he was unwilling to raise the state tax on gasoline, which would replenish the nearly depleted New Jersey Transportation Trust Fund Authority. New Jersey has the 48th lowest gas tax in the nation at 14.5 cents per gallon, according to the Tax Foundation. New York, the other state involved with the Port Authority, has the highest gas tax in the U.S. at 50.6 cents per gallon. Instead of funding New Jersey roads with gas taxes paid by state residents, Christie chose to take toll revenues and fees paid by drivers in the entire region.

Is muniland doping the data?

Puerto Rico and New Jersey may have played with the numbers recently to put a better gloss on their weak finances. They seem to be “doping” the data.

For example, Puerto Rico (with assistance from the Bureau of Labor Statistics) has revised six years of employment data to cast a positive upward revision to its economy. This had spillover effects on the broad economic measures of the island. From Puerto Rico’s Government Development Bank:

The payroll employment benchmark revision not only impacted the average level of payroll employment, it also changed its average growth rate for previous years.

New Jersey is getting squeezed everywhere

The largest governor in America, New Jersey’s Chris Christie, was outed this week by the New York Post for undergoing weight reduction surgery. Reuters reports:

New Jersey Governor Chris Christie, who has struggled with obesity for much of his adult life, underwent lap band surgery in February to reduce the size of his stomach, at the urging of his wife and children, his press secretary said on Tuesday.

Is New Jersey fiscally imploding?

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):

More budget illusions in New Jersey

Last Friday, New Jersey Governor Chris Christie proposed to levy a $10,000 fine on anyone who leaked the state’s fiscal data ahead of official announcements. Politicker NJ quoted New Jersey state Senator Barbara Buono (a Democrat from Middlesex):

“Governor Christie came into office promising ‘fiscal transparency’ and signed an executive order [in 2010] requiring his Treasury Department to issue revenue reports on the 10th business day of each month,” Buono noted. “But now that revenues are coming in below the governor’s wildly optimistic projections, revenue numbers are suddenly a state secret and the governor wants total control over the flow of information.”

“Whether New Jersey taxes are coming in as expected should not be kept secret from New Jersey taxpayers and it should not be kept secret from New Jersey legislators who are responsible for ensuring that the state budget remains in balance. Like the United States Constitution, the 1947 New Jersey Constitution established a government with three equal branches. It did not establish an imperial governorship.”

Chris Christie’s latest budget gimmick

Chris Christie, the Republican governor of New Jersey, is a master at distorting facts and attacking his political opponents. Politicians do this everyday, of course, but Christie is especially confrontational, and his go-for-the-throat approach must leave Democrats in the state legislature feeling bullied and weary.

For all of Christie’s aggression, little real governing happens in his state. New Jersey still has a structurally unbalanced budget. The state still relies on short-term deficit financing and other tricks to get the budget balanced at the end of the fiscal year. Since Christie took office in November 2009, the state’s debt load reversed its downward march and returned to the high levels last seen in 2005 under former Governor Jon Corzine. Christie’s rant in the video above about Democrats’ profligacy betrays his own actions.

Since February, when Christie proposed his budget for fiscal year 2013 (beginning July 1, 2012), he has been very optimistic about the state’s revenues and has been fixated on cutting the state income tax. Moody’s and others warned at the time that the tax cut was imprudent because New Jersey’s budget was based on fanciful assumptions. Here’s what I wrote in February:

Christie wants to cut taxes while the cashbox is empty

New Jersey Governor Chris Christie got a lot of media attention this week when he announced that Warren Buffett “should just write [the government] a check and shut up,” on CNN’s Piers Morgan Tonight. His great one-liner obscured the more profound question he was being asked, which was: Shouldn’t the wealthy pay a higher proportion of taxes? Beliefs about progressive taxation vary widely, but income taxes at every level of government are structured so that the wealthy pay a higher proportion of taxes.

If I had been asking the governor questions, I would have focused on his fetish for cutting income taxes when his state’s cashbox is nearly empty. Or as the rating agency Standard & Poor’s defined the problem:

New Jersey Gov. Chris Christie released his proposed $32.15 billion budget for fiscal 2013 on Feb. 21. The budget remains structurally unbalanced, is built on what Standard & Poor’s Ratings Services regards as optimistic economic projections to close the budget gap, and increases New Jersey’s (AA-/Stable) reliance on nonrecurring revenues.

Profligate Republicans and prudent Democrats

If you need more evidence that Republicans are no longer the party of fiscal prudence and that the Democrats are no longer out-of-control spendthrifts, take a look at two recent tax plans from the governors of New Jersey and Maryland. In an overture that primarily benefits the richest residents of New Jersey, Republican Governor Chris Christie has proposed cutting his state’s income taxes by 10 percent across the board, even though his state desperately needs revenue. At the other end of the spectrum, Maryland’s Democratic governor, Martin O’Malley, has proposed fading out deductions and exemptions for the richest taxpayers in his state, effectively raising their tax rates.

Maryland’s credit rating is a sterling AAA. In contrast, New Jersey is rated in the bottom tier of states for credit quality. Christie is further destabilizing New Jersey’s fiscal condition by reducing the amount of revenue without corresponding reductions in expenses. A profligate Republican state and a prudent Democratic one — isn’t it supposed to be the other way around?

In some of the best local political journalism that I’ve seen (watch the fantastic video), New Jersey’s Star-Ledger reported that Governor Christie’s proposed 10 percent income tax reduction has practically no chance of passage. The Star-Ledger editorial page editor, Tom Moran, speculated that Christie’s action was either a legislative bargaining chip or an act of pandering to the national press. Democrat Loretta Weinberg, the New Jersey senate majority leader, pointed out that a millionaire would get about $7,200 in relief under Christie’s plan, while a family earning $50,000 a year would get about $80. Meanwhile, the tax cut would cost the state about $1 billion.

Muniland’s most active states

In the municipal bond market, one of the most insightful ways to examine a state is to look at how actively its bonds trade. Broker-dealers make money by trading, so naturally they go where the action is and commit market-making resources to those states. It’s generally true that the most populous states are the ones with the most traded bonds, but if we map the wealth of a state’s citizens to how often that state’s bonds trade, we get some interesting results. For example, New Jersey, which has only 2.8 percent of the national population but a high proportion of its wealthy citizens, might have the highest number of municipal bond owners as a percentage of state population.

The municipal bond market does not trade on an exchange but rather on “alternative trading systems” (ATS). These are systems where dealers post inventories of bonds to be aggregated. The largest of the retail ATS is Bonddesk, which does some excellent data analysis for both the municipal and corporate bond markets.

From Bonddesk’s December Transparency Report I pulled the data for these charts showing the seven most actively traded states’ bonds. Bonddesk uses “investor buys” data, which represents trades that end up in a retail investor’s account. In the bond markets there are often many trades between broker-dealers before the securities land in an investor’s account, so Bonddesk scrubs the data to show the real level of investor demand.

Let Europe kill municipal CDS

The solution to Greece’s debt crisis that Europe’s leaders announced on Thursday has market participants and commentators howling. It includes a provision that changes long-established rules for credit-default swaps mid-game. Mike Dolan, Reuters’ Investment Strategy Editor in Europe, said this:

For all the ifs and buts about the latest euro rescue agreement, one of its most profound market legacies may be to sound the death knell for sovereign credit default swaps — at least those covering richer developed economies.

I’d suggest that death knell just rang for U.S. municipal credit-default swaps (CDS), too. They’ve recently been on their last legs amid collapsing volumes, but actions in Europe just might have delivered the deathblow.

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