Just in time to set a record for 1992, New Jersey is scheduled to sell $1.6 billion of general obligation refunding bonds today.

Lazard Freres & Co. will serve as senior manager for what should be the largest single tax-exempt bond issue of the year. Market players say yesterday's downgrade of the state by Fitch Investors Service will probably not hamper the deal.

The legislative groundwork for the issue was laid Monday. The state Legislature's Joint Budget Oversight Committee authorized the deal, while lawmakers passed and Gov. Jim Florio signed into law a bill allowing the state to use bond proceeds to refund previously refunded bonds and to sell zero-coupon bonds.

The state is issuing the bonds to achieve debt service savings by advance refunding outstanding bonds bearing high interest rates and to provide cash-flow savings in fiscal years 1993, 1994, and 1995.

New Jersey finance and investment officials said the deal is an innovative way for the state to lower its debt service for the next three years and spread the payments over the 20-year life of the bonds.

But rating agency officials noted that the refunding, while lowering debt service costs in the short run, will increase overall debt payments and lengthen the average life of the state's debt.

Richard McGrath, spokesman for state Treasurer Samuel Crane, said the deal will accomplish many goals.

For example, he said, the state will be able to lower its annual debt service payments over the next three years to about $225 million from $ 1.1 billion, freeing up about $900 million in cash.

The refunding would save taxpayers about $23.7 million in present-value savings, according to McGrath.

Proceeds from the sale will be used to advance refund higher-coupon debt, and to lower the state's debt service by $235 million in the current fiscal year and by about $340 million in each of the next two fiscal years.

Freeing up cash would allow the state to put money in other projects.

First, some of the savings will be used to fund a capital program. In fiscal 1994 and 1995, the state will place $270 million per year into a newly created capital improvements fund.

McGrath said this fund will be used for needed repairs to state parks, hospitals, mental health facilities, and schools.

McGrath said reports from Florio's office estimate that the budget surplus for fiscal 1993, which ends June 30 of that year, will be about $30 million.

By using $235 million of bond proceeds from today's deal, the state's surplus fund would rise to $265 million. Another $50 million will be put into the state's rainy-day fund for each of the next two fiscal years.

The rainy-day fund and the surplus fund are separate and different. The rainy-day fund is used specifically for unanticipated emergencies, while there is greater latitude in how the surplus fund can be used, according to Sen. Robert Littell, R-Franklin, chairman of the. Joint Budget Oversight Committee. For example, he noted, if certain state programs need additional funding during the fiscal year, the state could tap the surplus fund.

The last time New Jersey issued GO bonds was on Dec. 10, 1991. That $413 million issue was won through competitive bidding by Lehman Brothers and included serial bonds priced to yield from 4.20% in 1993 to 6.45% in 2012.

Although the state faces an estimated $1.7 billion budget shortfall in fiscal 1994, McGrath and Robert Lurie, director of public finance for the state, said none of the proceeds from this sale would be used to fill that gap.

"The deal accomplishes a lot of goals," McGrath said. "But plugging the budget gap is not one of them."

By pricing the deal before Christmas, the state will also avoid having to making a $25 million debt service payment in January because those bonds are being refunded in the deal.

Hyman Grossman, a managing director at Standard & Poor's Corp., said that although the deal sounds complicated, it is "really not that odd a deal."

"Certainly, the deal will provide some relief for the state in the next few years," he added.

The loan is expected to include uninsured serial bonds from 1996 through 2013.

Market players said the Fitch downgrade would likely have little effect on the price of the new bonds, although they noted it was not a "positive development." Fitch lowered the state's rating to AA-plus from AAA.

There are no quoted New Jersey bonds circulating in the secondary market, but traders estimated the long end of the deal would be priced to yield between 6.15% to 6.20%.

The state's GO debt was confirmed at Aa1 by Standard & Poor's Corp. and AA-plus by Moody's Investors Service.

A detachable call option may be included, said Lurie. "That decision will be made at the last minute," he said Tuesday.

Such an option usually applies to a portion of a deal. The purchaser of the call would own the right to call the bonds, effectively creating non-callable debt.

If the state opts to sell the call option on a portion of the loan, it may use First Boston Corp. to market the product since the firm has been involved in several deals in which a call option was sold.

"We have showed the state how the option works and the results of using the option," said Lawrence Bashe, vice president at First Boston Corp. "They are still deciding on whether to use it or not." Bashe said the state could decide to sell the option after the sale of the bonds if it felt it was appropriate.

Lurie said the state went without a financial adviser on the deal because the staff of the Office of Public Finance was able to construct a creative enough proposal on its own.

This year, refundings have accounted for 48.8% of total tax-free issuance nationwide. This has been attributable to low interest rates and, especially, the large amount of deals sold in 1982 with double-digit coupons that reached their first call date in 1992.

Some smaller issuers in New Jersey have contributed to this high number of refundings, including Rutgers State University, Camden Co., and Parsippany-Troy Hills.

But the state itself has not refunded any debt this year.

McGrath said today's deal "has been in the works for quite a while," accounting for some of the state's wariness about doing refundings.

Another possible concern that held the state back from doing a refunding any earlier this year is concern over its credit rating.

This is a realistic concern, made evident by Fitch's action yesterday.

"Because of the state's shaky economic condition and decision to lower taxes in the midst of a recession, the rating was changed," said Claire G. Cohen, executive vice president of the ratings agency.

Lurie said the decision, "would have no impact on the state's decision to sell the bonds."

"Fitch had expressed concerns throughout the process," Lurie said. "It's not that much of a surprise."

Both McGrath and Lurie said the state has "been in close contact" with rating officials over the past few weeks to keep them appraised of their progress in the deal.

Commenting on its rating affirmation, Standard & Poor's said in a release that the state's economic base remaining diverse and personal income being ranked second in the nation.

For Moody's part, Robert Kurtter, assistant vice president at the agency, said a deal of this size forces rating agency officials to take a "long, hard look" at the state's rating.

"We've been watching the state for some time," he said. "It's under significant financial stress.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.