Governor Jon Corzines proposal for New Jerseys toll roads sets a dismaying precedent: some of the plans proceeds would indirectly fund past spending that has zilch to do with roads. While the Corzine plans ultimate goalsinvesting intelligently in infrastructure and reducing state debtare worthy, its a bad idea to ask toll payers to fund the second goal.
Under Corzines plan, the state will enact four separate toll hikes on the New Jersey Turnpike and the Garden State Parkway between 2010 and 2022, adding up to a potential fivefold increase between now and then; it will also adjust tolls for inflation. And it may start levying a charge on a currently toll-free road. The new money wont go directly to New Jersey or to the existing Turnpike Authority, however; instead, the state will set up a new public benefit corporation to collect the tolls and run the roads under a decades-long contract with the authority. Corzine believes that the corporation will be an improvement over the authority, in part because it will have a professional management team and an independent board of directors supposedly free of political patronage.
In exchange for the right to run roads and collect tolls, the corporation will pay the state an enormous sum$32.6 billion, in the most conservative scenario. It will get the money from private lenders who, the governor claims, will make the loans even though the state wont guarantee repayment, because theyll know that future tolls will cover their debt.
What will New Jersey do with the money that it receives from the corporation? For starters, it will dedicate about $8 billion to improving the toll roadswhich is certainly a good use of the money. But it will also use $16 billion to refinance statewide transportation debt and $1.4 billion to refinance debt that was used to buy and preserve land. The problem with this part of the plan: it refinances past debt far into the future. It would be smarter to pay down debt for last decades project sooner, to free up more money for next decades project.
An even bigger problem with Corzines initiative is what he plans to do with the remaining $7 to $12 billion, or between 20 and 30 percent of the total proceeds of the new toll-road proposal. The governor wants to use the money to pay off some of the states general debt obligationsdebt that has little to do with the states transportation infrastructure and that in some cases is operating debt, not capital debt. (As Corzine said in his State of the State address last week, New Jersey has done substantial borrowing for operating costs.) Because the new corporation will essentially be financing its massive payment to the state with the tolls that it plans to collect, those tolls become, not fees to use roads, but taxes to pay for items that have nothing to do with roads or transit.
Corzines proposal is unwise for yet another reason: if New Jersey significantly cuts its debt through the toll plan, it will have the opportunity to raise more debt. Thats why many financial advisers counsel against taking out a home-equity loan to pay off your credit-card debt: they know that you could easily run up debt on your credit card again, and be stuck with the new home-equity loan to boot. Corzine says that hell deal with the risk by asking the legislature to require voter approval for future borrowing that does not have a dedicated source of revenue. But it would be better for New Jersey to impose that legislative limit firstand then see, during one or two bad budget seasons, whether the state can stick to it and whether it has any loopholesbefore giving bond-rating agencies the opportunity to say that New Jersey, at least in theory, has plenty of room to raise new debt.
The risks are sufficient for Corzine to take apart the pieces of his plan and deal with each issue separately. If the state is in dire need of transportation improvements that cant be funded through existing tolls, he should propose raising tolls reasonably to fund such improvements. If the existing turnpike authority is so riddled with patronage that it cannot responsibly manage the toll roads, then the new public benefit corporation, under a carefully written agreement with the state and run by a professional management team experienced in infrastructure, might indeed do better. (Though we should still wonder, if the state is so incompetent that it cant manage its roads, how it will be competent enough to design and manage a long-term contract for the corporation.)
Finally, if Corzine believes that New Jerseys debt obligations are so onerous that it cannot go forward under the burden, he should make that case to the legislature and votersperhaps proposing to pay down the debt with a general tax levy, to be borne by all taxpayers, rather than just toll payers. Voters might well prefer that the state try to cut spending, rather than impose such a tax. And they should have the chance to consider these choices, rather than get stuck funding state debt every time they drive down the road.
Nicole Gelinas is a Chartered Financial Analyst and a contributing editor to City Journal.