(Bloomberg) -- New Jersey Governor Phil Murphy and Democratic legislative leaders have agreed on a plan for the state to borrow as much as $9.9 billion to cope with revenue losses from the coronavirus outbreak.
The Assembly had approved a bill in June authorizing at least $5 billion in borrowing backed by tax collections, but Senate President Stephen Sweeney had held it up, seeking more legislative input. Under the agreement among Murphy, Sweeney and Assembly Speaker Craig Coughlin, a four-member commission -- two senators and two assembly members -- would have to approve each request to borrow with a majority vote.
The Senate intends to act on an amended measure next week. The bill would then return to the Assembly for concurrence before reaching Murphy’s desk. Both houses are controlled by Democrats.
Murphy, 62, a first-term Democrat and retired Goldman Sachs Group Inc. senior director, has said that New Jersey faces “Armageddon” without legislative authority to borrow, as well as federal aid. The borrowing in part would rely on general-obligation bonds and the Federal Reserve’s Municipal Liquidity Facility, according to Sweeney and Murphy
Republicans said the plan would lead to tax increases. They threatened a legal challenge, citing the state constitution’s ban on this kind of financing for revenue needs; Murphy has said he is confident in an emergency clause.
The authorized borrowing amount, $9.9 billion, is 98% of the estimated $10.1 billion revenue shortage projected through June 2021. Including coronavirus-related expenses combined, Murphy said, the state could be short $20 billion -- about equal to the state’s total income-tax and corporation business-tax collections in fiscal 2019.
“It does not obviate the need for federal cash,” Murphy said of the borrowing plan at a Trenton news conference.
Sweeney, New Jersey’s highest-ranking state lawmaker, had said in recent weeks he needed to know which taxes would rise, and by how much, to repay the bonds before posting the bill. But he said his thinking has changed.
“Before we talk about higher taxes we are going to have to talk about reforms,” Sweeney said in an interview. Encouraging school districts to regionalize -- as some had been studying for years prior to the novel coronavirus outbreak -- would be one way to bring savings, he said. Wall Street ratings companies also want to see spending cuts, he said.
Senator Declan O’Scanlon, a Republican from Little Silver, said the potential borrowing set a new standard for poor fiscal moves.
“That’s exactly why borrowing schemes like this must be approved by the public,” O’Scanlon said in a statement. A colleague, Senator Sam Thompson of Old Bridge, said taxpayers would shoulder bond payments for 35 years.
Sweeney said he had renewed confidence in a $500 billion state and local government stimulus bill sponsored by U.S. Senator Bob Menendez, a New Jersey Democrat. Republican congressional leaders have balked at the effort, which would give states like New Jersey money to plug budget holes, but Sweeney said that may change now that the virus is spreading rapidly in some Republican-led states.
“With more red states in, it’s not just a blue issue -- it’s a United States issue,” Sweeney said.
In a Bloomberg Television interview on Thursday, Murphy said to expect unspecified “revenues raisers” -- typically, tax increases -- in the budget he presents to the legislature for the nine-month spending year that starts Oct. 1.
“We did not get into any discussions on revenues,” Murphy said, referring to the pending Senate borrowing authorization bill. “It’s too early to tell on taxes.”
New Jersey’s state credit is rated the second-worst behind Illinois carrying an A3 rating by Moody’s and A- by S&P and Fitch. The state has about $44 billion in bonded obligations, as of June 30, 2019, according to the state’s debt report released in April.
Most of New Jersey’s outstanding debt isn’t issued by the state itself, but rather state-run entities including the New Jersey Economic Development and the New Jersey Transportation Trust Fund authorities. Those bonds are backed by state revenues that are subject to appropriation by the legislature.
Murphy’s planned borrowing would be backed by the state’s full faith and credit pledge and repaid with general fund revenue, a type of debt that under ordinary circumstances is subject to voter approval. About $1.8 billion, or 4.6%, of New Jersey’s bonds are general obligations, according to its most recent debt report.
(Updates with Sweeney comments starting in second paragraph)
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