The Jersey City Independent "

As the administration and City Council grapple with Jersey City’s budget woes, the city is sitting on a pile of debt that’s nearly as large as its yearly revenue stream — a collection of municipal bonds totaling nearly $500 million. Meanwhile, New Jersey municipalities’ bond ratings are currently being reduced faster than any other state in the nation. What does this mean for Jersey City’s debt load and long-term financial health? And how does it affect the current budget crunch?

Municipalities, like other financial entities, occasionally need to borrow money in order to finance large projects requiring a lot of capital. If the financial health of a company or municipality is good, it can issue debt directly through bonds rather than taking a bank loan. This option is often preferred because bank loans can carry higher interest rates as well as debt covenants — stringent restrictions on the use of the borrowed funds and even on other financial activities not related to the project being funded by the loan.

Jersey City has issued debt through bonds a number of times in the last few years, a practice which occasionally raises the eyebrows and the ire of taxpayers. For example, the city recently floated $4.38 million in bonds to pay for the purchase of a Central Avenue building owned by the Parking Authority.

According to the city’s Division of Management and Budget, Jersey City’s total outstanding bond debt exceeds $361 million, plus another $101 million in school bonds. However, with the inclusion of bonds the city guarantees but did not issue, like city Housing Authority bonds,* the load climbs to near $800 million.

When the city issues a bond, it asks investors to front the cost of whatever purchase it is looking to make. In return, it promises to pay them back in installments, with interest.

But investors don’t have to guess at how likely they are to recoup their money. Specialized financial firms, called ratings agencies, make an evaluation of an entity’s financial health and ultimately the likelihood that it will default on a given loan. These evaluations, called ratings, start with AAA at the top and end with D at the bottom, with modifiers like “positive,” “stable,” and “negative” tacked on to give investors additional information about future financial outlook.

So how does Jersey City fare in this alphabet soup of bond ratings? Not so hot, it seems.

In December, when the bonds on the Parking Authority purchase were issued, the agencies Moody’s and Fitch rated Jersey City’s outstanding obligations at a Baa and BBB, respectively — essentially identical ratings that reflect a mid-range level of risk.

While the city’s outlook was listed as stable by Moody’s and positive by Fitch, according to a municipal bonds analyst — who asked not to be named because he is not authorized by his firm to speak on the matter — this picture isn’t as rosy as it may appear to the layman.

Municipal bonds “are usually very highly rated,” the analyst says. “It would reflect poor finances to have a rating that low.” He notes that government bonds tend to perform better than corporate bonds because governments have the unique ability to generate revenue without increased demand for services — by raising taxes and fees.

A 2009 report from ratings agency Standard & Poor’s (S&P) backs this up, finding that state and local governments are “less vulnerable [than corporations] to economic fluctuations” such as those brought on by the recession. S&P chalks this resilience up to governments’ ability to cut services and raise taxes, “although such actions are unpopular.” The hundreds of residents who have come to recent City Council meetings to protest proposed tax hikes would seem to beggar the word “unpopular” in Jersey City’s case.

Why, then, such tepid ratings for Jersey City?

S&P and the other ratings agencies use standardized criteria to make their judgments about credit risk. In a document describing its criteria, S&P notes that “a government’s ability to implement timely and sound financial and operational decisions … is a primary determinant” of its credit rating. “If a government is unable or unwilling to employ its authority in a timely manner to address events that impact its budget and financial condition, its credit rating can be adversely affected.”

If there’s a word to describe Jersey City’s budgeting process, it’s probably not “timely.” Last year, the city budget was passed with only 55 days remaining in the fiscal year. This year looks to be no different, with the budget not likely to see a final vote until at least March. In the meantime, the city pays for things by issuing “emergency temporary appropriations” at each City Council meeting; critics say this makes it exceedingly difficult to truly tame the budget, since almost all the money is spent by the time the document is prepared and voted on.

The bond analyst says that typically local governments with poor ratings have expenses that exceed the operating budget, rely on one-time revenue sources and transfer funds between accounts to pay for expenditures. Local good-government activists and some elected officials say Jersey City is guilty of all of these practices, and have increasingly questioned them in recent years.

With the administration encountering staunch resistance from taxpayers on a proposal to raise property taxes, and Gov. Christie taking aim at special municipal aid, Jersey City’s financial picture could get even uglier.

“It seems fairly reasonable that a worsened financial situation would or should lead to a downgrade,” the analyst says, while refusing to specifically speculate on whether Jersey City might be in line for a ratings downgrade in the near future.

A slide in ratings would make it even more costly for the city to issue new bonds, because investors would demand higher interest payments for the increased credit risk. This development could put the brakes on large-scale construction and infrastructure improvement projects, or it could lead to the city trying to find the money to fund these projects from other sources, namely taxes and fees.

But Elizabeth Bergman, an assistant vice president at Moody’s and the lead analyst for the firm on bonds issued by New Jersey local governments, does not expect Jersey City’s rating to fall in the near term. While she allows that her firm’s Baa rating is “on the lower end” of the spectrum of investment-worthy bonds, Bergman tells JCI that a “stable outlook reflects the expectation that the rating will be maintained over the next 18 to 24 months.”

Whether or not a downgrade is in the cards, the story told by Jersey City’s bond ratings speaks directly to a number of flashpoint issues surrounding this year’s budget process.

The report explaining the Moody’s rating, which Bergman co-authored, makes note of several “significant challenges” faced by the administration in the 2010 fiscal year. In particular, the report points out that “several of the one-time revenues which supported the 2009 budget will not be available,” including the $15 million settlement payment from Honeywell and a $15.5 million deferral of state pension fund payments.

Despite an $18.5 million property tax increase and furloughs in most city departments, Moody’s notes the administration is still faced with a $35 million to $40 million reported budget gap.

Meanwhile, the city sports an above-average overall debt burden (equal to 3.2 percent of the city’s value), and it expects to continue issuing $20 million to $25 million in new bonds every 12 to 15 months, according to Moody’s — more than it plans on paying down. And while the report finds the average amount of borrowed principal the city pays off over a 10 year period to be a “below average” 59.3 percent, Bergman says that number isn’t particularly worrisome, and the bond ratings indicate that there is very little chance the city would default or have to seek bankruptcy protection.

The report also says the slowing of development projects and problems in the financial services industry could pose additional problems for the city’s financial position.

Even though revenues from existing PILOT payments — the “payments in lieu of taxes” made by owners of tax-abated properties — are declining, coming in $3 million under budget in Fiscal Year 2009, Moody’s notes that overall PILOT payments will remain stable in the short term as completed projects come online to offset those declines. But with a slowdown of new development projects in the pipeline, and few of the existing long-term tax abatements expiring soon, the total amount of collections from PILOT payments may decrease in the future.

The city’s reliance on the troubled financial firms that populate Downtown’s Wall Street West for jobs is also a cause for concern, the report says. “Nine large financial institutions account for 16 percent of total employment in the city,” Moody’s reports. As those firms continue to deal with continued turmoil, many have — and more may — resort to layoffs, such as when Jersey City’s second-largest employer Goldman Sachs laid off 540 people in 2008. The overall unemployment rate in the city has been above ten percent for eight months and continues to exceed the state and national averages.

Jersey City’s bond ratings tell a grim story, one that is a direct reflection of some troubing characteristics of the city’s financial management. And with the administration proposing a 25 percent tax increase while it prepares to further slash services and lay off employees, there is no indication that any happily-ever-afters will be heard of soon.

* While we used the example of Housing Authority bonds as just that — an example — it has come to our attention that the wording could lead a reader to believe that Jersey City currently guarantees bonds floated by the Jersey City Housing Authority. Since this is not the case, we have removed that language from the story. We apologize for any confusion this may have caused.

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