New Jersey is the King of junk bond opportunities:
Dec. 15 (Bloomberg) -- New Jersey is headed toward a public finance crackup. It's just a matter of time. The state isn't alone.
Over the past three years, states and localities have sold record amounts of bonds, some to take advantage of lower borrowing costs and pay for new projects, some to refinance outstanding, higher cost debt, some, like New Jersey, to gain short-term budget relief.
In those places, at some point, the public finance magic wears off, and taxpayers are left wondering what happened.
In New York, for example, the Metropolitan Transportation Authority finds itself under fire for asking for new taxes and higher fares, just years after it concluded a massive, $14 billion refinancing.
In Pennsylvania, Northumberland County borrowed and spent its way toward a bankruptcy narrowly averted.
Those aren't the only municipalities where taxpayers are now wondering about what their political leadership did, and incidentally about the quality of advice they got from their underwriters and financial advisers.
A crackup is defined as a collapse or failure, a breakdown. In the municipal market, it's marked by that moment when ``stop the music'' is called.
More often than not, the public finance crackup is characterized by too much debt and too much politics, although in New Jersey, it appears that lack of political will is the culprit.
Auction Sale
The ingredients of a public finance crackup are volatile, the reaction delayed. The precise combination is always local and specific, which is why such crackups, like the municipal market itself, resist generalization.
A public finance crackup notably occurred in New Jersey in 1993, after the Securities and Exchange Commission, the Justice Department and the NASD all announced they were looking into why Wall Street was paying tiny, unknown Armacon Securities for -- what, exactly? Armacon was owned by two of then-Governor Jim Florio's close associates. If you wanted to get bond work in the state, it was apparently a good idea to send Armacon a couple of checks.
Governor Florio signed an executive order forcing all state issuers to sell their bonds through auction, also known as competitive, sale. Call it a big ``time out'' for the industry in the state.
Now the state is heading toward another crackup. This time around the apparent reason is not enough politics, rather than too much.
`Stop the Music'
What it will look like, nobody knows, because like all public finance crackups, there is a delay. New Jersey is one of the nation's wealthiest states, ranking second in per capita income after Connecticut. So a crackup will take some time.
But at some point, someone, perhaps a new governor, perhaps a rating company, is going to call ``stop the music'' to the state's lust for deficit financing.
The state announced last week that it was selling $763 million in bonds in order to effect a refinancing that would result in a present-value saving of $3 million, or less than one- half of one percent. Issuers traditionally look for present-value savings to be in the 4 percent to 5 percent range.
``The only way to measure a refinancing is through present value savings, and we are clearly ahead by that measure,'' said state Treasurer John McCormac, adding that the transaction was ``a win-win for New Jersey taxpayers.''
This is one of those remarks that really should be memorialized somewhere so it is never repeated.
`Win-Win'
Here's the ``win-win.'' With the refinancing, state lawmakers defer $430 million in debt service for two years. In exchange, taxpayers get to pay an additional $106 million over the life of the bonds.
In exchange for very short-term budget relief, the state is saddling taxpayers with years of indebtedness. Perhaps the most telling comment of all came from Assemblyman Louis Greenwald, who told the Bergen Record, ``Today we found $430 million to keep programs alive.''
New Jersey politicians don't want to cut spending. Instead, they want to borrow money until such time taxes come in to support whatever level of spending they deem necessary to get themselves reelected, whatever party they represent.
This may sound familiar. In July, the state's Supreme Court ruled that the state could go ahead with $2.5 billion in borrowing to balance the budget, but that it must not sell such bonds in the future. New Jersey lawmakers knew they were looking at a big hole in the budget for fiscal 2006. To fill it, they are doing -- more borrowing!
Don't blame Wall Street. Wall Street is very, very good at selling municipal bonds, because that's what Wall Street is paid to do. That's why the impulse to control a transaction and get it done is irresistible. Don't look to Wall Street for impartial advice on fiscal restraint. Wall Street will get bonds sold two days before someone yells ``stop the music.'' |
