Responses to Questions on Governor Corzine’s
Financial Restructuring and Debt Reduction Initiative
New Jersey League of Municipalities

At a briefing on the Governor’s “Financial Restructuring and Debt Reduction Initiative,” conducted by Governor Corzine’s Chief of Staff, Bradley Abelow, earlier this month, League Officers raised a number of questions. They appear below, with the Administration’s responses.
We will continue to review the proposal, as it takes shape in the form of legislation. And we will keep you posted on any developments.

1. The Public Benefit Corporation will sell bonds in order to obtain the
projected $32 - $38 billion infusion of monies.  Who or what provides the guarantee of repayment in the event of a shortfall?

Answer: The principle and interest payments on bonds will be made by the PBC. The State of New Jersey, and the taxpayers, will have neither a moral nor a legal obligation for repayment. The bondholders are obligated to repay and no one else. Reserves will be established to provide comfort for lenders.

2.  As to the projection of anticipated revenues due to toll increases over a period of years:  1) Are they realistic and/or attainable?  2) Are there any potential long term changes of toll road use (i.e. trucks using local, toll-free roads, or bigger emphasis on use of mass transit, etc.)? 3) Are the projections better than past projections of anticipated revenues (i.e., corporate taxes, income taxes and sales taxes)?

Answer: 1) The anticipated revenues are realistic and attainable.  2)  The revenue assumptions developed by the traffic and revenue engineers take into account that a manageable percentage of drivers who currently use the toll roads will divert off to toll-free roads.  However,  the models  also indicate that many drivers will return to the toll roads as they find, by way of their own cost benefit analysis, they can save significant travel time and fuel consumption versus a non-tolled road.  This is consistent with prior behavior when the Turnpike Authority raised tolls in the 1990s.  3) We are confident that following an exhaustive analysis from our traffic and revenue consultant and financial advisor, an analysis that takes into account multiple economic, elasticity and demographic factors, and combinations of factors, that our projections are sound and verifiable.   Clearly, the market will determine whether our estimates are accurate by the size of the loan they are willing to give the PBC.

3. IRS approval is needed for tax exempt status, can it be obtained?

Answer: The ability to achieve tax exempt status on the bonds is a complicated process that reflects the many provisions of the US tax code that apply to the issuance of tax exempt bonds.  We have received from tax counsel guidance as to how the IRS might look at the structure of the PBC and whether its bonds would be tax exempt.  The final determination shall be made after the PBC is formed and formally files for tax exempt rulings from the IRS.  (Since it is the PBC that will be issuing the bonds, not the State, the PBC is the party that must seek the formal IRS ruling.)  We are optimistic that if the model the Administration has put forth becomes a reality, the PBC will obtain that status.

4.  Are there plans for reducing the State workforce?  If there is an ever increasing cost, is it salary, wages and benefits?

Answer: Governor Corzine has reduced the New Jersey State workforce, primarily through attrition and through a strict hiring freeze, by approximately 2000 employees since taking office in January of 2006.  The hiring freeze remains in effect indefinitely. Workforce salaries and benefits represent approximately $5 billion out of a $33.4 billion budget.  The Administration will continue to aggressively search for ways to shrink the size of government.
 
5. What is the effect of freezing the State budget at $33.5 billion on the local municipality?

Answer:  The effect of freezing State spending depends on where the budget is reduced, where it is increased and where it stays flat.   Approximately three-quarters of all State spending is in the form of grants-in-aid and State aid that go back to the citizens and property taxpayers of the state.  Much of the remaining 25 percent is obligated by constitutional, contractual and other fixed expenses, such as debt service payments.  As such, maintaining spending at current levels could necessitate significant cuts or other funding decisions in the remaining three-quarters slice of New Jersey's budget pie.

6. Can tax rebates be reduced to help solve the fiscal crunch?

Answer:  Clearly, the people of New Jersey have spoken loud and clear that property tax rates are their single largest concern. The Governor and the Legislature worked last year to begin to address this issue. While it is possible that the rebates could be cut, it is unlikely that the Governor and Legislature would walk away from the most pressing problem facing the people of New Jersey.

7. What is the political reality to pass this proposal without giving up some funds to other programs?  (Example:  schools construction appropriation for Abbott expanded to include monies to non-Abbott out of same pot).

Answer: We will not know the political reality of this proposal until it is vetted and debated with the public and the Legislature in the days and weeks ahead. But this is not about “giving up” money for other programs; it is about financial restructuring and debt reduction.   It is also worth noting that the State funding that was authorized in 2000 to assist with school construction in the so-called non-Abbott districts served to replace funds that otherwise would have been raised through property taxes.

8. How do you lock in funds just for transportation improvements and debt reduction?

Answer: Initial proceeds can only be used for the specified purposes of paying down debt and funding transportation capital needs. The terms of the underlying concession agreement between the State authority that will own the toll roads and the PBC specify this. This concession agreement is an enforceable contract, and under the United States Constitution and the New Jersey Constitution, that contract cannot be impaired by the government.

9. What strategies are being contemplated to deal with potential increase in traffic on secondary roads?

Answer: Our analysis indicates a manageable diversion of toll traffic onto non-tolled roads.  However, this proposal, if enacted, would allow New Jersey to make capital investments in the state's transportation system, with priority given to heavily congested roads.  The funding would be made possible through the Transportation Trust Fund, which would be relieved of its current debt.  Absent replenishing through some other means, the TTF will no longer be able to fund transportation projects after 2011.