Bloomberg News

New Jersey Aid Holdup May Force Towns to Borrow to Pay Workers

December 06, 2011

Dec. 1 (Bloomberg) -- New Jersey lawmakers’ inaction on $139 million in state funding for cities in financial distress is forcing some local officials to delay payments to school districts and vendors and consider borrowing to make payroll.

Six of 11 cities waiting for their share of the so-called transitional aid operate on a calendar year, giving them a month to make their cash last without a collective $16.2 million. Disbursement of the assistance, promised in July, has been held up by a dispute between Republican Governor Chris Christie and Democrats who control the Legislature over how to fund the $1.5 million cost of supervising payments.

Christie cut transitional aid 13 percent from $159 million last year to help wean municipalities off the assistance. Half of U.S. cities have had state aid reduced since 2009 as governors deal with budget deficits, according to a September survey by the National League of Cities. Mayors are struggling to raise revenue and cut costs to balance their books.

“We’re at the point now where we have to triage the bills we pay and how we handle our financial obligations,” Terry Reidy, city manager of the seaside community of Asbury Park, said in a Nov. 28 telephone interview. “Short-term borrowing is the only option I can think of. We have to meet payroll and there are certain obligations that we have to meet.”

Asbury Park, in line for $10.4 million of transitional aid, has enough cash to pay bills through mid-December, Reidy said. Harrison, home of the stadium for Major League Soccer’s New York Red Bulls, is shifting money around its municipal accounts as it waits for $4.5 million from the state, said chief financial officer Gabriela Simoes.

Oversight Costs

Christie, 49, initially included $10 million for transitional aid in the $29.7 billion budget he signed in June. He then agreed to restore the money in a supplemental spending bill as long as his administration got more power over it. The Democrats’ legislation, introduced last month, calls for an additional $1.5 million for the cost of that oversight.

The governor told reporters on Nov. 28 in Camden that he would sign the measure “if oversight money is in the $139 million.” Senate President Stephen Sweeney, the state’s highest-ranking Democratic lawmaker, said Nov. 22 that the oversight costs shouldn’t come out of the cities’ money.

“If you take another million-and-a-half dollars from these cities, you may as well be putting a stick in their eyes,” Sweeney, of West Deptford, said in a telephone interview. “They are already dealing with diminished funding.”

State Aid

In a Nov. 22 e-mail to finance chiefs of the six towns, Thomas Neff, director of the state Division of Local Government Services, said he can’t award the aid until the bill passes. Neff told the officials that cash advances are possible to prevent defaulting on debt or missing other crucial payments.

The memo was provided to Bloomberg News by a person familiar with the matter who asked for anonymity because he wasn’t authorized to share the information.

“Please be mindful of this situation and postpone the payment of all but the most essential bills to preserve your cash flow until such time as the Legislature has acted,” Neff wrote.

Lisa Ryan, a spokeswoman for the New Jersey Department of Community Affairs, which includes Neff’s division, said the department “has been in constant contact with transitional aid communities and has been working with them to manage cash flows until such time as the Legislature has acted to appropriate funds.”

“We will ensure that all debt payments and other critical obligations are met on time,” Ryan said in an e-mail.

Under Review

The biggest transitional-aid awards this year are slated to go to Camden, with $61.4 million; Trenton, $22 million; Paterson, $21 million and Union City, $12 million. Those cities, whose budget years run from July to June, are under review by Moody’s Investors Service for possible credit-rating downgrades because of lawmakers’ inaction.

Of the six municipalities counting on the money by Dec. 31, Harrison is the most in debt, with $53 million of obligations outstanding, according to data compiled by Bloomberg. The town of 13,620 in northern New Jersey had its rating on $17.5 million of general-obligation debt cut five levels to Ba3, a junk rating, from Baa1, the third-lowest investment grade, by Moody’s Investors Service in May.

Debt Report

Harrison has used short-term financing for debt payments related to the Red Bull arena’s development, lacks “a long-term solution to its outsized debt burden and debt service,” and may not be able to get more state and county support to meet its obligations, Moody’s said in a report.

Josellyn Yousef, one of the Moody’s analysts who wrote the report, said “we are monitoring” developments on transitional aid and declined to comment further.

Simoes, the town’s CFO, said her office has received delinquent tax payments that have “offset some of the impact” of not getting the state aid. Should money run low in the short term, Harrison will transfer funding among accounts, “a common practice year after year whenever there are cash-flow challenges,” she said.

“We don’t have any imminent payments due,” Simoes said, when asked whether Harrison would be able to make debt service.

Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC in Philadelphia, said he doesn’t think the state would let Harrison default on debt “on kind of a technicality.”

“I’m sure they’ll get this aid,” Schankel said.

Penns Grove

Penns Grove, a southern New Jersey borough of 5,100 that’s part of Sweeney’s legislative district, is due $750,000 of transitional aid. The town has withheld two school payments totaling about $500,000 in order to pay vendors, according to chief financial officer Stephen Labb, who said he hopes the district doesn’t seek immediate payment to cover its own bills.

The town can meet payroll for the next two weeks, and has considered loans to cover any additional gap in its $6.3 million budget, Labb said.

“That would be our only other option and short-term borrowing would have interest, so it would defeat the purpose of this aid,” Labb said.

Christie termed the aid “transitional” because cities are to be gradually phased out of the program. In exchange for the aid, mayors give the state a say in local decisions, including hiring and contract awards. Last year, 22 mayors shared $159 million in assistance.

Asbury Park

In Asbury Park, the $10.4 million it’s counting on is a quarter of its $40 million budget. The city outsourced emergency-dispatch services to Monmouth County to save $500,000 this year, and as much as $300,000 in coming years, said Reidy, the city manager. Beach fees contribute $875,000 to its budget and parking fees add $800,000, he said.

“When transitional aid is 25 percent of your budget, having a plan to wean yourself off that is not something you can do overnight,” Reidy said. “The name of the game is decreasing your costs and increasing your revenue.”

Christie, at a meeting yesterday of the Republican Governors Association in Orlando, Florida, said he’s asked mayors in the affected communities to call their legislators in Trenton and ask them to expedite passage of the measure. He declined to say whether he’ll back tacking the $1.5 million onto the aid or whether he’ll only approve subtracting it from cities’ take.

“If we’re going to send $139 million of taxpayers’ money into struggling cities that have a history of waste and abuse, I’m only doing it if there’s sufficient money and personnel to see that the money is not wasted,” he said.

Labb said he’s “pretty confident” that lawmakers and Christie will come to an agreement before the end of December. Reidy also said he expects the aid to be approved.

“I’m almost crossing my fingers right now,” Labb said. “We cannot go until the end of the year and not get this money.”

--Editors: Stacie Servetah, William Glasgall

To contact the reporters on this story: Elise Young in Trenton at eyoung30@bloomberg.net; Terrence Dopp in Trenton at tdopp@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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