MONETIZATION OF ASSETS:
THE NEXT GIMMICK OR BEST CHOICE?

March 8, 2007

By David Rebovich, Politicker NJ  

In the Whitman years, it was revaluing the state worker pension fund according to "market value," not "book value." For Jim McGreevey, the magic bullet was supposed to be the "securitization of funds" that the state was awarded in the massive national tobacco company settlement. For Jon Corzine, there is no magic bullet that can cure New Jersey's deep financial problems. But according to the current governor, there is a new technique that can help the state deal with its problems. It's called "asset monetization."

Another governor. A continuing crisis. And now another confusing term for a, well, confusing way to help the state out of the huge and worsening fiscal mess that it still is in. And "in" because previous techniques that citizens were also told would help actually made matters worse. Switching to a market valuation of the public worker pension fund at a time - the mid-1990's - that stock market was bullish - was used by both the Whitman and McGreevey administrations to justify not paying into the fund for several years. Now the state owes that pension fund upwards of $25 billion, and the public teachers pension fund finds itself $10 billion short.

The McGreevey Administration borrowed billions against money New Jersey was promised from the settlement with tobacco companies. The legal justification for that settlement was that the state had to cover charity health care costs for uninsured smokers and needed money to pay for anti-smoking campaigns and programs. Instead, McGreevey used the securitized funds to balance the state budget for a few years while increasing spending that, as Corzine has discovered, it cannot easily sustain.

So along comes Corzine, the former Wall Street financier, with his own policy priorities, commitment to certain budget principles and practices, and with more serious long-term fiscal problems than his predecessors had or were willing to admit. The Governor wants to provide residents with significant property tax relief. He wants to expand education and health care programs and preserve open space, all of which is costly. He recognizes state government's legal obligation to fund new school construction in distressed districts and to pay for better child welfare programs.

After supporting a controversial sales tax increase in the current budget, he claims that he will not ask for any increase in broad based taxes because of their impact on individuals and on the state's already unfavorable business climate. Nonetheless, he wants to balance future state budgets without relying on the gimmicks and one shot revenue sources that his predecessors have. In addition, the Governor recognizes that for state government to be on firm financial footing, he needs to start dealing with its unfunded liabilities. There are the state worker pensions funds mentioned above and the public worker and retiree health care program that are facing a whopping $75 billion dollar shortfall. In addition, state government is carrying a 30 billion dollar debt that requires a $2.7 billion debt service payment in next year's budget.

These unfunded liabilities and debt service payments are a drag on the budget, preventing the state from paying for needed programs and pursuing new, worthwhile ones. They also pose a threat to taxpayers who, despite Corzine's commitment to not hiking taxes, will likely be forced to pony up more money unless state officials do something. So what does the Governor want to do? Well, he still hopes to save money by having an independent comptroller identify wasteful spending and programs that do not achieve their stated goals. He also wants to establish performance benchmarks to encourage efficiency in state, local and school programs. However, these measures will not free up the kind of money the state needs to make a big dent in its debt or to fund its pension liabilities. In fact, Corzine would use any funds freed up by a comptroller or by administering benchmarks for more property tax relief.

Oh, yes, there is the possibility that the Governor's economic growth policies will provide the state with more revenues, but that will take time. In the meantime, the Governor also has to deal with the reality that both parties in Trenton, but especially his fellow Democrats, have a strong impulse to spend.. And, the motivation to cut spending is generalized. Most legislators agree in principle that savings can be achieved. But when asked to identify specific cuts they would support, lawmakers typically recommend chopping programs or aid that go to people or towns living in someone else's districts.

So what's left as a technique for decreasing the state's debt and increasing payments to its pension and health benefits funds? Enter "asset monetization." To many residents this seems like one of those fancy-sounding phrases for a risky financial practice. And the Governor admits that there are risks involved in any such practice, but this one is worth considering giving New Jersey's limited options for dealing with its serious problems. In a nutshell, what asset monetization would do is enable the state to get cash for selling or leasing rights to properties it owns. The property most mentioned is the New Jersey Turnpike, because of its great value and because other states have leased toll roads to private firms to garner big cash windfalls.

That cash would then be used, according to Corzine, to pay down the state debt. Doing so would reduce annual debt service payments, which are approaching $3 billion a year. The money saved could then be used to make the appropriate annual payments to the public worker pension and health insurance funds or to pay for some new programs. Given the state's situation, this seems like a reasonable approach. However, many legislators in both parties and a great many citizens are concerned that selling or leasing - the latter is more likely than the former - of major assets like the Turnpike may jeopardize the quality of services and their cost to users.

But the Governor believes that big hikes in tolls and concerns about needed maintenance and roadway expansion can be avoided by carefully crafting contracts with any private firm. Some legislators, along with the Governor, are open to having the state pension fund lease the Turnpike for an up-front payment of some $10 billion to $15 billion. The state pension fund would then replenish its coffers with revenues from the tolls. Another alternative to privatization is to have another state agency or new commission borrow billions to pay to the Treasury against anticipated toll revenues. Toll increases can be regulated by the state, and police patrols, snow removal and other road maintenance could be guaranteed because state government would still own the asset.

Discussions about asset monetization are in the early stages. It should also be noted that the Governor's Office wants to look into monetizing a variety of assets, like space above train stations, office buildings, and perhaps recreation areas. While public opinion may not support privatization of a major strategic asset like the Turnpike, citizens may think differently about other facilities. In any event, given the state's fiscal situation, its short and long term financial responsibilities, and citizens refusal to support higher broad based taxes, asset monetization needs to be taken seriously as an option. But before any decisions are made, New Jerseyans will need to know not just the short and long terms advantages of the practice but the costs as well.