Treasury Retires More than $3 Billion in State Debt, Saving New Jersey Taxpayers More than Half a Billion Dollars

(TRENTON) – The Department of the Treasury this week successfully completed the last in a series of transactions necessary to ultimately retire more than $3 billion in combined debt principal and interest, saving taxpayers more than half a billion dollars in the process.

The Fiscal Year 2022 budget allocated $3.7 billion for the Debt Defeasance and Prevention Fund to improve the State’s long-term fiscal health and substantially reduce outstanding debt. In doing so, $2.5 billion was earmarked for defeasing (retiring) existing debt while $1.2 billion has been allocated to support capital construction in order to avoid incurring new debt.

“This is about making New Jersey more affordable for this generation and beyond,” said Governor Phil Murphy. “Paying down debt will relieve some of the pressure on taxpayers and free up funding to invest in the things that matter, proving that we can place a premium on fiscal responsibility without sacrificing our values.”

“This was an extremely complex undertaking and our Office of Public Finance, along with the other professionals involved, deserve to be commended for both their diligence and expediency throughout this process,” said State Treasurer Elizabeth Maher Muoio. “At the end of the day, we have substantially reduced our debt load while securing real savings for the taxpayers of this state.”

BONDS DEFEASED

Between November 15 and February 1, Treasury’s Office of Public Finance, the State’s financial advisor, bond counsels, and the Attorney General’s Office conducted eight separate bids to purchase U.S. Treasury securities using the $2.5 billion available for debt defeasance in the NJ Debt Defeasance and Prevention Fund. In total, $2.247 billion in bonds were defeased among the following series:

• State General Obligation Bonds;
• NJ Building Authority Bonds (NJBA);
• NJ Economic Development Authority (EDA) School Facilities Construction Bonds; and
• NJ Economic Development Authority Cigarette Tax Revenue Bonds.

SAVINGS TO TAXPAYERS

The bonds that have been defeased had a total debt service cost of $3.107 billion, including principal and interest, over their remaining life. When measured against the cost of purchasing the securities, the net savings to the State is $607.2 million over ten years.

Additionally, Treasury’s Office of Public Finance estimates that the State’s $3.7 billion Debt Defeasance and Prevention Fund will ultimately save the State $5.31 billion in the long term:

• By defeasing roughly $2.25 billion in debt, the State avoided paying a total of $3.1 billion due to the interest that would have been owed on the remaining life of the bonds.
• Once the $1.2 billion that has been appropriated for debt prevention (to fund capital construction on a pay-as-you-go basis) is fully utilized, it will save the State roughly $2.2 billion compared to borrowing at current interest rates to fund capital construction.

THE PROCESS

The administration moved quickly to initiate a defeasance plan after the Appropriations Act was signed in late June of last year. Treasury’s Office of Public Finance (OPF) immediately began the process of identifying bonds for possible defeasance. OPF, together with the State Attorney General’s office and outside bond counsel, then began scheduling the required board meetings to obtain the necessary authorizations from each entity whose debt had been identified for possible defeasance.

State issuing officials met in late October to approve a list of possible GO bonds to be defeased, while the boards of both the NJ Building Authority and NJ Economic Development Authority met in November to approve lists of possible State contract bonds. OPF then selected bonds from the approved lists to be defeased, targeting those maturities that had a call date in the near future, which would provide the greatest savings for the State (within the 10-year period outlined in the authorizing legislation).

Throughout late fall and the first half of winter, OPF purchased U.S. Treasury securities using money appropriated to the New Jersey Debt Defeasance and Prevention Fund for the selected bonds. The U.S. Treasury securities have since been placed into irrevocable escrow accounts at a trustee bank. At each bond’s call date, a portion of the U.S. Treasury securities plus interest earned will pay off the bond in full.

All bonds defeased through this process have been effectively removed from the State’s balance sheet at the time the U.S. Treasury securities were placed into escrow.