A state lawmaker is raising alarms over $750 million in bonds issued by the state’s transportation trust fund last week, saying officials should have instead used money from a $3 billion fund to forgo borrowing amid rising interest rates.
Sen. Declan O’Scanlon (R-Monmouth) said the $750 million in new bonds would cost New Jersey more than $1.5 billion over the next 30 years, and could force an increase in the state’s gas tax.
“If there were ever a time to avoid issuing debt, it’s when you have high interest rates,” said O’Scanlon, the Senate Republican budget officer. “Why do that? Why not buy time and save money by avoiding the debt in the first place?”
The debt carries interest rates ranging between 5% and 5.5%, rates that are slightly higher than similar bonds issued by the transportation fund earlier this year. The added cost compared to the earlier bonds is the result of rising interest rates seen over the past year and not a loss of investor confidence or flagging demand, said Matt Fabian, a partner at Municipal Market Analytics, a research firm that focuses on municipal bond markets.
“The state borrowed about what people would have expected it to, and it’s within recent ranges,” he said.
The senator said he worries the added debt — which brings the aggregate debt service for the trust fund’s transportation program obligations to $13.6 billion through 2050 — would force an increase in New Jersey’s 41.4-cent gas tax. Revenue from that tax is constitutionally dedicated to the transportation trust fund, and adjusts automatically based on the health of the fund.
Save now to spend later?
The $3 billion Debt Defeasance and Prevention Fund is meant to save the state money on debt service by paying down existing debt ahead of schedule, thereby reducing interest payments, or by directly funding capital projects to avoid borrowing altogether.
The new transportation bonding closely follows an NJ Spotlight News report that the Treasury will seek approval to pay down $1 billion in school construction bonds in February using money from the Debt Defeasance and Prevention Fund.
If the Joint Budget Oversight Committee approves those expenditures, it would leave the fund with roughly $2 billion.
Fabian said the state might be best served by “keeping its powder dry” and holding onto debt defeasance money in case the Federal Reserve continues to raise interest rates into next year.
“If interest rates are another 1% higher or 2% higher next year at this time, then that might be the time to use pay-go capital in advance,” Fabian said, noting the state could also defease the new bonds if interest rates stabilize.
The Fed raised interest rates by half a point on Wednesday, bringing its policy rate to between 4.25% and 4.5%, the highest level in 15 years.
Federal Reserve officials said they expect to raise rates to 5.1% by the end of 2023 to combat persistent inflationary pressures, though they expected to draw rates down in 2024.
Economists saw the first signs of moderating inflation on Tuesday when new consumer price index figures showed falling energy, medical, and car prices, among others. They broadly expect inflation to moderate in the coming year, though other household costs have continued to rise.
Paying down other debt
Money from the debt defeasance fund was used to pay down roughly $2 billion in bonded debt last year, a move Treasury officials said would save the state an estimated $600 million in debt service over the next decade.
Earlier this year, lawmakers used nearly $3 billion from the fund to back capital projects overseen by the Schools Development Authority, the Department of Transportation, and NJ Transit.
A spokesperson for the governor said the administration would explore where else to use the money.
“In addition to the appropriations included in the budget, we are working with our partners in the Legislature to evaluate additional options in relation to the state’s needs and current market conditions,” said Jennifer Sciortino, the spokesperson.
It’s not clear yet how much the state expects to save by paying down $1 billion in school construction bonds early next year. Danielle Currie, a Treasury spokesperson, said officials are still finalizing the list of bonds to be paid down.
O’Scanlon, one of the Joint Budget Oversight Committee’s two Republican members, said he might reluctantly back that plan, but said the state should focus on paying down its most expensive debt, which would preclude much of the debt the state issued when interest rates were low at or near historic lows in recent years.
“What I want is to pay off, defease, or avoid debt that’s going to save my taxpayers the most money,” he said. “If someone has some other rationale, they should share it. But that’s my focus, so I’ll be asking that question.”
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