How N.J. got $30B in the hole

August 12, 2007 Record

Any way you count it, New Jersey is deep in debt.

The state owes nearly $30 billion to its creditors and just paying the cost to cover that debt is eating up more than $2.5 billion a year.

That means less and less money each year for aid to public schools, hospitals, towns. And – directly or indirectly – it means higher taxes.

The situation is so bad that Governor Corzine is preparing to sell off state properties – everything from the lottery to the New Jersey Turnpike – to raise money.

"We are the guys who got stuck at the end of the game of musical chairs. We're trying to find a way to dig out of the hole we're in," state Treasurer Bradley Abelow said.

Here's a look at how the state got this far in debt, what it means and what some say New Jersey should do to steady its financial future:

Just how much does the state owe?

The most recent calculation puts that figure at $29.7 billion – or roughly $3,500 for every man, woman and child in New Jersey.

That total debt figure jumps to $37.4 billion once money owed by independent agencies such as the New Jersey Turnpike Authority and the Sports and Exposition Authority is included.

And the total amount doesn't cover the hundreds of millions of debt already approved and scheduled to be borrowed, like the $400 million in bonds for affordable housing to be issued this week, or the more than $650 million for open space preservation that's on the November ballot for voter approval.

What does all that cost?

The state is paying $2.6 billion this fiscal year to cover the cost of borrowed money. That's up more than $1 billion in the past five years alone.

It costs taxpayers more now to pay for borrowed money than the state will pay on its massive new property tax rebate program. Debt service eats more of the current budget than aid to suburban towns, public colleges and universities, even more than it costs to repay hospitals for treating uninsured patients.

State officials say it's going to get worse. In four years, it will cost taxpayers another $500 million – or a total of $3.1 billion – just to pay the principal and interest on the current loans. Again, that financing charge doesn't factor in the already scheduled debt and any new loans.

Where did all the money go?

It built bridges, repaired roads, and expanded highways. It went to medical research involving stem cells. Governors and legislators borrowed to improve facilities at public colleges and universities as well as hospitals. More than $8 billion alone was borrowed to build schools in the state's poorest cities, part of a court order to improve public education.

But the people running Trenton have been borrowing more and more. In 1998, total debt was $13.3 billion.

And in one case – a tactic now outlawed by the state Supreme Court – former Gov. James E. McGreevey borrowed $2.2 billion just to cover part of the annual operating costs. People who buy cigarettes or pay motor vehicle fines for the next two decades will be paying off that particular debt.

Another debt deal now causing a payment crunch was the pension bond plan.

What was the pension bond?

In 1997, Gov. Christie Whitman borrowed $2.8 billion to cover an "unfunded liability" in the pension system. The liability had been created over the years by the state not setting aside enough money to cover the impact of a series of laws that sweetened workers' benefits. The state had been paying the equivalent of 8.75 percent interest on the liability over 67 years, and the 29-year bonds carried an interest rate of just 7 percent.

So what's the problem?

The bonds were structured to have lower interest payments in the early years that spiked in the future, and that future has arrived. Also, the bonds were not callable, meaning the state could not refinance when interest rates dropped. In addition, the infusion of cash from the bonds into the pension fund allowed the state to skip regular pension payments for several years. When those payments were supposed to resume, the state was stuck in a recession and couldn't afford to make them, so a new, and bigger, unfunded liability is growing in the system.

Why not refinance?

Each individual bond or loan has its own financing terms. The pension bonds, for example, can't be refinanced. And states, unlike businesses or homeowners, operate under different laws that prevent them from refinancing public debt over and over again. That's to protect taxpayers.

Corzine has refinanced some of the debt, particularly the Transportation Trust Fund. Refinancing, however, has its downside. The transportation refinancing freed up nearly $1 billion for highway projects in part by stretching out repayment of some of the fund's existing debt from 21 years to 30 years.

One of the new debts scheduled to go online this week has its payments postponed until 2031.

Why not repay more now to cut back on the overall debt?

The overall debt is so big that it would take several billion more each year just to make a dent. Rough calculations by the Treasury Department show that if the state doubled what it pays now – adding $2 billion to the payment – taxpayers could cut back the debt by $160 million in the first year.

Why is this a problem now?

Such massive levels of debt make it hard for the state to borrow more. That means needed construction projects like new prisons, college dormitories and other buildings are being postponed.

Economic development efforts that would grow the economy and bring in more taxes are also on hold.

"If you're operating the kind of infrastructure that the state is operating and you don't invest in it, it will deteriorate rapidly," Abelow said.

What can be done about it?

Stop all new spending and start paying off the debt, says state Sen. Anthony Bucco, R-Morris.

"I don't think people realize what has been happening over these last five, six years," Bucco said. "We've taken on more debt than the state had in its history of 200 years and it's continuing to go that way."

Corzine, however, is looking to an unprecedented plan he calls "asset monetization" to use state assets like the turnpike to generate even more money through a sale or lease to private companies. The plan has raised fears of higher tolls.

Whatever money the state gets in those deals would be used to help pay back the existing debt, and free up money in the budget for health care, education or other programs.

"Asset monetization is fundamentally seeking to deal with the crisis we have with debt in this state," Corzine said recently, adding that the time has come "to restructure our finances and plan for the future."