Nonpartisan Analysis Refutes Republican Stance Against Rolling Back Tolls

A view of the Senate Chambers from the 2010-2011 Senate Reorganization.

Governor’s Spokesman, GOP Senator Proven Wrong By OLS

TRENTON – A key argument made by the Christie administration and legislative Republicans in their fight against lowering tolls on drivers using the New Jersey Turnpike and Garden State Parkway has been dismantled by recent analysis by the nonpartisan Office of Legislative Services (OLS).

“There is now simply no doubt the toll hikes can be stopped and that Governor Christie must take his case for raising tolls directly to the people, instead of trying to circumvent them,” said Senate President Stephen M. Sweeney (D-Gloucester, Cumberland, Salem) sponsor of legislation that would roll back the portion of the 2008 toll hike that was to be dedicated to the now-cancelled ARC tunnel project. The bill also is sponsored by Senator Nick Sacco (D-Hudson).

The Governor recently announced his intention to use the entirety of the toll hike to fund the Transportation Trust Fund (TTF). Last month, Christie administration spokesman Michael Drewniak called Sweeney and Sacco “uninformed,” and definitively said that since the New Jersey Turnpike Authority had already sold bonds in anticipation of a toll hike that will take place in 2012, “You cannot simply roll them back.”

Additionally, as a member of the Senate Transportation Committee, Senator Andrew Ciesla (R-Ocean) reiterated the administration’s claim that the tolls could not be rolled back and used that as a central reason for voting against the Sacco/Sweeney measure.

But the OLS analysis stated that the Christie’s Administration’s assertion is not correct. According to OLS, “the funds that the authority has budgeted for the ARC Tunnel payments are not part of its debt service obligation, meaning that they have not been ‘bonded’ for ‘other projects’ or, indeed, allocated for anything else.”

“The fact that the tolls can be rolled back is a clear example that the Governor and his administration do not understand their own plan,” said Sweeney. “It questions the integrity of their plan to fund the TTF through more borrowing and claiming money for a project that isn’t being built.”

A copy of the memo is below.

TO: Andrew Hendry

Executive Director, Senate Majority Office

FROM: Donald S. Margeson

Section Chief

DATE: January 31, 2011

SUBJECT: NJTA Revenue and ARC Tunnel

Payment Obligations

This memorandum addresses your question to David Rosen about whether the New Jersey Turnpike Authority has used the anticipated toll revenue that would have been needed to meet its obligation to contribute $1.25 billion towards the ARC Tunnel project to bond for “other projects.” As a related matter, the memorandum considers the broader question of the adequacy of the authority’s revenue to meet its obligation to its bondholders.

The December 10, 2010 prospectus for the authority’s $1.85 billion Series 2010A revenue bond issue takes note (p.19) of the November 24, 2009 ARC Tunnel agreement with New Jersey Transit, including the authority’s obligation under the agreement to make annual installment payments of $195 million each in the years 2012 through 2017 and a final payment of $80 million in 2018. The prospectus also notes that the Governor cancelled the State’s participation in the ARC project on October 27, 2010, and that the authority assumes that the Tunnel agreement will accordingly be “terminated or amended in the future,” so that payments under the agreement “become available for other non-Turnpike System purposes.” In other words, the funds that the authority has budgeted for the ARC Tunnel payments are not part of its debt service obligation, meaning that they have not been “bonded” for “other projects” or, indeed, allocated for anything else.

The authority’s covenants under its General Bond Resolution effectively prescribe this result. Under these covenants with its bondholders, the authority pledges, first to apply its revenue to the payment of operating expenses, and then to deposit the balance in a series of funds according to a stated priority sequence (p.16 of the prospectus). At the head of this sequence are the deposits for debt service and for a debt reserve. After these deposits have been made, others are made to lower-priority funds. After those deposits are made, the remaining revenue is deposited to the General Reserve Fund “to be used for any corporate purpose of the authority.” It is from this fund that the ARC Tunnel payments are (or were) to be made. The prospectus notes that “[t]he obligation of the authority to make the ARC Tunnel payments is limited to the amounts on deposit in the General Reserve Fund which are legally available to be used by the authority for such purposes and is subject and subordinated in all respects to the pledge created under the Resolution.”

Since the authority’s obligation to make its ARC Tunnel payments is separate from and subordinate to its debt service obligation, it seems appropriate to ask if the projected revenues of the authority are sufficient to meet both its liability for debt service and the Tunnel payment obligation. A chart on p.69 of the prospectus (copy enclosed) indicates that they are. After deducting from total authority revenue the amounts required for debt service and for anticipated deposits to the lower-priority funds mentioned above, “net revenues available for [deposit to the] General Reserve Fund” are projected as follows (amounts in millions):

2012 2013 2014 2015 2016 2017 2018

$383.1 $374.9 $349.0 $330.6 $313.7 $298.8 $303.9

In each of the first six years, the General Reserve Fund is anticipated to receive deposits exceeding by more than $100 million the $195 million ARC payment due in that year; in the seventh and final year, the anticipated deposit exceeds the $80 million payment obligation by more than $200 million.

The above table shows that the authority’s anticipated resources are financially adequate to cover its debt service requirements, projected deposits to “other funds,” and the scheduled installments of its ARC Tunnel payment obligation. The General Bond Resolution, however, poses an additional test before any payments, beyond those needed to cover operating expenses and debt service, may be made. This might be called a bondholder protection test. Under the Resolution, the authority covenants to “fix, charge and collect tolls . . . in amounts so that, in each calendar year, the Net Revenues shall at least equal the Net Revenue Requirement for such year.” Net revenue is revenue after the payment of operating expenses. The net revenue requirement is defined as “the greater of (i) the sum of the aggregate debt service, maintenance reserve payments, special project reserve payments and payments, if any, to the charges fund . . . or (ii) 1.20 times the sum of the aggregate debt service for such period . . . .”

Basically, the “bondholder protection” test is a two-prong test. The payments referred to in item (i) (apart from debt service) are the same payments to the “lower-priority” funds discussed above. Thus the table – which shows the excess of Net Revenue over debt-service-plus-other-fund-deposits for the term of the ARC Tunnel agreement – demonstrates that the authority is projected to comply with prong (i) of the test at least through 2018. The chart in the prospectus shows that the authority is also compliant with prong (ii) of the test: the ratio of Net Revenue to net debt service is presented as the first of the two “coverage ratios” shown at the bottom of the chart, and this ratio exceeds 1.20 for the entire period through 2018.

Since your concern with the revenue adequacy question relates in part to proposed legislation (S2636/A3736) directing the authority to reduce tolls no longer required for payment of ARC Tunnel contributions, you may be interested in whether cutting toll revenue by the amount of the no-longer-required ARC contributions would (all else equal) still leave the authority enough revenue to meet the bondholder protection test. We already know from the table that prong (i) is met, because even if the net revenue figures for 2012-2018 were reduced to reflect cancellation of the annual contribution installments, the figures in the table would still be positive. Application of prong (ii) requires simply reducing Net Revenue for each year by the amount of the installment and re-computing the Net-Revenue-to-net-debt-service ratio. Here are the results:

2012 2013 2014 2015 2016 2017 2018

1.44 1.39 1.35 1.31 1.28 1.26 1.39

Each year’s ratio is greater than 1.20, so prong (ii) of the test would also be met.

It’s important to note that the legislation in question doesn’t really set a schedule for the toll reduction. Although it directs the reduction to be taken “immediately,” it provides that the reduction is to reflect the discharge of the authority’s contribution obligation, which the authority could read as contemplating a reduction, beginning in 2012, that sticks to the schedule of cancelled installment payments. Or it could stretch the reduction over a longer period of time. It is further important to note that the authority would retain the option – if, contrary to its projections of seven weeks ago, revenues turned out to be inadequate to ensure compliance with the bondholder protection test – of raising tolls in the future.