Christie Punches Below Political Weight on Debt: Muni Credit
(For more credit-market news, click on TOP CM. For Municipal Credit Markets column alerts, see SALT MUNCREDIT.)
Feb. 26 (Bloomberg) -- Governor Chris Christie delivers the final budget of his first term today as automatic federal spending cuts loom and investors demand a 40 percent higher penalty on New Jersey issuers since the Republican took office.
While state-tax revenue has improved since Hurricane Sandy walloped the East Coast Oct. 29, it’s still $350 million short of Christie’s goal. The 50-year-old governor, who is seeking re- election with record popularity, will have to close that gap before turning to his plan for the year that starts July 1.
Christie predicted a year ago that New Jersey’s comeback had begun and revenue would rise 7.2 percent this fiscal year, the most since before the 18-month recession began in 2007. He said then that the state could afford a 10 percent income-tax cut, even as Democrats and Standard & Poor’s challenged his forecasts. Through January, collections are up 3.9 percent.
“My main hope is that the revenue picture for the state will increase, and the state will use it to try to address its ongoing revenue shortfall for budgets,” said Richard Larkin, director of credit analysis at Herbert J. Sims & Co. in Iselin, New Jersey. “However, given the fact that it’s an election year, that may be too much to expect.”
S&P revised its outlook on New Jersey’s debt to negative from stable in September, citing Christie’s “optimistic” assumptions, an unfunded pension liability and the use of one- time revenue to close shortfalls. The company will examine Christie’s budget to determine whether his revenue targets are reasonable, said John Sugden, an S&P analyst in New York.
“We have a focus on structural balance and whether the budget is relying on a significant number of one-time revenues, and how the budget is set up to deal with some of the unknowns, such as the Affordable Care Act and the potential sequester,” Sugden said.
New Jersey has an Aa3 grade from Moody’s Investors Service and AA- from Standard & Poor’s, both three levels below the top. Only Illinois and California have lower ratings.
Christie has a record 74 percent approval rating, up from 56 percent before Sandy struck, according to Quinnipiac University polls released Jan. 23 and Feb. 20. He has approval from 56 percent of Democrats in a state where that party’s registered voters exceed Republicans by 703,000.
Yet the governor is punching below his political weight in the bond market.
Investors demanded 0.49 percentage point of extra yield on New Jersey and its localities as of Feb. 24, data compiled by Bloomberg show. That compares with a 0.35 percentage point spread when Christie took office in January 2010. It’s also 56 percent higher than the five-year average premium.
Christie’s prediction for 7.2 percent revenue growth was second only to a 7.7 percent jump forecast by California Governor Jerry Brown, according to the New Jersey treasurer’s office. S&P raised California’s credit rating in January for the first time since 2006 after Brown, a 74-year-old Democrat, projected that a tax increase and spending cuts would leave the state with an $851 million surplus, the first in a decade.
States this week are preparing for federal cutbacks, as President Barack Obama and Congress are locked in a standoff over how to avert $1.2 trillion in spending reductions set to take effect on March 1.
New Jersey will lose more than $39 million in U.S. funds, according to an Obama administration report. That includes $27.7 million for primary, secondary and special education, which may jeopardize 370 teacher, aide and staff jobs.
State-tax collections beat Christie’s target in December and January after five straight months of missed projections. Still, major revenue sources will need to jump 12.7 percent to achieve Christie’s year-end target of $31.7 billion, David Rosen, chief fiscal analyst for the nonpartisan Office of Legislative Services, wrote in a Feb. 22 report.
In light of Rosen’s calculation, Assembly Budget Committee Chairman Vincent Prieto said he expects Christie to make more conservative forecasts for the next fiscal year.
“You’d rather err on the side of caution,” said Prieto, a Democrat from Secaucus.
In December, as the state faced a $451 million shortfall, Christie said mid-year budget reductions may be needed. He has continued to push for a tax cut, saying it would help spur the economy.
Sandy kept shoppers and Atlantic City gamblers at home, causing November revenue to miss Christie’s target by 11 percent. He has said collections may rebound as rebuilding creates jobs. New Jersey’s unemployment rate was 9.6 percent in December, the fourth-highest in the nation.
Christie has yet to explain how he will make up for the current year’s shortfall, Prieto said. The lawmaker said he met with Treasurer Andrew Sidamon-Eristoff on Feb. 21 for a budget preview and got no particulars.
Assemblyman Declan O’Scanlon, the Republican budget officer, said Christie has reason for optimism.
“The dynamics nationally bode well for end-of-year tax collections,” said O’Scanlon, of Little Silver. “Automobile sales have ticked up. The stock market went up 10 percent. In no way does this mean we’re out of the woods, but these are the signs.”
Neither Michael Drewniak nor Kevin Roberts, spokesmen for the governor, responded to e-mails or phone calls.
The governor told reporters in Sea Bright Feb. 21 that a priority was “making sure we have the strongest K-12 education system we can possibly have.” New Jersey spends about a third of its budget on school aid.
In his first budget, Christie reduced funding for schools and towns, cut property-tax rebates and skipped a $3 billion pension payment to help close a record $10.7 billion deficit. The state’s highest court ordered him to restore some of his school cuts. Last year, Christie provided $8.87 billion for education, the most in state history, according to his office.
Christie has said reviving Atlantic City’s casinos, which are battling a sixth-straight year of declining revenue, is key to the state’s recovery. He said last week he isn’t giving up on his five-year turnaround plan, even as the city’s newest casino, Revel, plans to seek bankruptcy protection.
Lawmakers today will consider Christie’s changes to a bill that will let casinos offer Internet gambling, and a federal court this month may decide on his law that would allow wagering on professional and college sports in Atlantic City and at racetracks. Proponents say those moves could boost state tax revenue by hundreds of millions of dollars a year.
Larkin, who has lived in New Jersey since 1989 and has been following the state since 1975, said he’d like today’s budget proposal to show that Christie is “making an extra effort to improve pension liabilities.”
New Jersey’s pension deficit reached $53.9 billion in 2010 after the state expanded benefits and skipped payments over a decade. The gap fell to $36.3 billion after Christie signed bills that boosted employee pension and health-care contributions, raised the minimum retirement age for new workers and froze cost-of-living adjustments.
A 2010 law required the state to make one-seventh of its pension contribution in fiscal 2012, and then raise the payment each year until it is making the full amount in 2018.
“In an election year, I’m expecting some kind of tax-cut proposal even though the state is still not fully meeting its ongoing obligations,” Larkin said.
--With assistance from Michael B. Marois in Sacramento. Editors: Stacie Sherman, Mark Tannenbaum