A budget impasse that’s left Trenton, New Jersey, without an approved budget well into the new fiscal year continues, despite a recent brush with default.
Beset by political rivalries, the state capital’s seven-member City Council, which must approve annual spending according to local law, has as of yet failed to produce the majority vote necessary to pass a $226 million spending plan Mayor Reed Gusciora proposed in April.
Division around tax provisions in the budget are to blame for the impasse that comes just months before a November election cycle in which three dissenting City Council members are considering runs against Gusciora.
The gridlock has so far forced city officials to cover the costs of municipal operations on a month-to-month basis via emergency orders in addition to holding up separate funding allocations for the local school district and fire department. More recently, it sent the city careening toward a $14 million July 15 debt service payment without the necessary funds to cover it.
The debt service payment, which corresponded to a wide range of bonds used to raise funds for utility improvement and education, was only made after the state took the rare step of intervening, ordering municipal officials to make the payment on time, according to officials at the state Division of Local Government Affairs.
While clashes between elected-officials at budgetary meetings or airwaves during an election cycle can be expected, what’s going on in Trenton is by no means “business as usual,” said Douglas Goldmacher, vice president and senior analyst at Moody’s Investors Service.
“There seems to be some serious debate about the city’s plans and future, and this complicates things,” he said. “But paying debt service is not something we expected to be up for debate.”
In addition to the recent payment, the proposed fiscal 2023 budget plans for another $12 million in debt service payments. The budget debacle has turned the usually mundane City Council approval process into a serious issue with a potential credit impact, according to Goldmacher.
Moody’s rates the city’s outstanding general obligation unlimited tax debt Baa1. The outlook on the underlying rating is stable. The city has roughly $218 million of debt outstanding, according to Moody’s.
Rating agencies often account for the structure of local political institutions when rendering a decision on municipal creditworthiness as a means of estimating “both the willingness and the ability to pay,” he said.
And while Trenton had the money to make the payments, its elected officials lacked the will to compromise, according to Goldmacher, making the fallout from Trenton’s present divide riskier than usual political infighting and potentially setting a precedent that does not bode well for investor confidence.
“This isn’t an administrative hiccup,” he said. “This was a decision not to pass a budget and a decision not to do the necessary steps to pay debt. They had to be ordered by the state. That does not happen on a regular basis.”
While Trenton has faced budgetary impasses in the past, including squabbles over tax levies and other more minor budgetary features, the need for state intervention is not a good sign and constitutes a “credit negative,” that brings up concerns about the long-term solvency of the city, according to Goldmacher.
“This is not the first time they’ve had a budgetary impasse, but I don’t believe they’ve ever gotten to the point where the state needed to order them to pay debt service,” he said.
Although local government is given a wide berth for controlling its finances by the state, New Jersey legally retains a wide range of options to ensure the solvency of struggling localities.
That helps alleviate some of the downward pressure on the city’s credit is currently facing, Goldmacher added.
In the past, those options have included a sliding scale of measures, from one-off payments as seen in Trenton, to full takeovers of finances in the more extreme cases, as was seen in Atlantic City.
In 2014, the state took control of the struggling city’s finances after plummeting casino and tourism revenue left it on the verge of insolvency. While the decision was not without controversy, the state still remains in control today and the fiscal picture for the city has improved.
However, a full takeover of Trenton’s finances remains unlikely despite the gridlock, according to Marc Pfieffer, Assistant Director at Rutgers University’s Bloustein Local Government Research Center.
Trenton’s budget impasse may be unusual, but it isn’t unprecedented. Although he could give no exact date for when it might be passed, Pfieffer said he believes the issue will likely be resolved within the confines of City Council hearings scheduled to run through December.
“The city is solvent, they have cash to operate,” he said. “There are no underlying financial problems other than those faced by an urban city. They’re able to pay their bills and they’re making their debt payments on time.”
With a hotly contested mayoral election around the corner, the disagreements between local officials are simply “political dialogue,” between representatives “who are very passionate about the city” and working within as lawful stewards of the city’s finances.
Trenton’s budgetary process isn’t “the best in the world,” said Pfieffer, “but it’s working,” yielding a resolution as it has in the past.
With City Council m”I think the general expectation is they will muddle their way through this one way or another,” he said.
Passions have overflowed between rival politicians at budgetary meetings more than once this year, with insults and barbs being traded between City Council members and the mayor at unusually contentious hearings. The situation led to the announced retirement or resignation of at least three longstanding council members frustrated with the ongoing process.
Further muddying the waters was a call by the mayor in July for a full-on state takeover of the city’s finances to stave off a financial crisis.
According to Pfieffer, the risk of a state takeover is currently low despite the call, as the local officials are “working their way through it.”
“There’s nothing bad that happens that they haven’t adopted at the beginning of August,” he said. “It’s not great policy, it’s not great management, but there’s nothing illegal about it yet because they’ve got running room.”
Still solvent, Trenton is a far cry from Atlantic City, and officials have an appreciation that “from time to time municipalities and members of governing bodies will have disagreements and find it difficult to agree on budget items on a timely basis,” meaning the state will likely be hesitant — even unwilling — to intervene more heavily, according to Pfieffer.
“Delayed budgets are not uncommon,” he said. “There is a process that provides for that.”