Lonegan Protests Moody's Too-High Rating of "Junk" New Jersey Contract Bonds

Americans for Prosperity Says Rating Begs Another Fannie-Freddie Catastrophe

Americans for Prosperity New Jersey Director Steve Lonegan held a news conference today to protest the irresponsibly high rating of risky New Jersey contract bonds by Moody's Investment Service. Lonegan was joined by a busload of New Jersey taxpayers and a giant inflatable ATM machine, which was designed to illustrate that taxpayers shouldn't be treated like an instant cash machine when politicians run out of money.

Following the news conference, Lonegan delivered a letter to Moody's Investment Service CEO Raymond W. McDaniel Jr., urging the bond rating company to reduce its rating and thus stop enabling the state of New Jersey in selling garbage bonds that plunge taxpayers further into debt. The high rating given to New Jersey's so-called "contract debt," which is not backed by the full faith and credit clause of the state, begs heavy losses for investors similar to the recent Fannie Mae and Freddie Mac crisis.

Lonegan wrote to Mr. McDaniel:

The practice of referring to these bonds as revenue bonds is highly misleading, because often - and specifically in the case of the pending $3.9 billion bond offering for school construction bonds - there is no revenue source other than appropriations by future legislatures, which cannot be bound contractually.

The major bond insurers face daunting financial uncertainty, and the Financial Guaranty Insurance Company, which insures many New Jersey EDA bonds, has already been downgraded below investment-grade. There is no guarantee, despite the millions of taxpayer dollars spent on bond insurance, that anything other than the political whims of future legislatures stands behind these bonds.

Americans for Prosperity is calling on Mr. McDaniel to set Moody's rating of New Jersey contract debt much lower to accurately reflect the substantial risk of default it carries.

Lonegan filed suit Monday against the state of New Jersey to block a $3.9 billion borrowing scheme being pushed through without voter approval. Article 8 of the New Jersey Constitution bars the state from incurring debt of more than $3.2 million without voter approval. However, during the past 25 years the state has avoided most referendums by creating separate entities, like the Economic Development Authority, to borrow the money. Eight years ago Lonegan first filed suit to stop the practice of issuing so-called "contract debt." In a narrow 3-4 decision, The New Jersey Supreme Court permitted then-Governor Christie Whitman's bond issue, but required a disclaimer be added to contract debt noting that the debt was not backed by the full faith and credit of the state.

"New Jersey Gov. Jon Corzine has repeatedly told voters that the state is facing a 'debt crisis,' yet Moody's continues to rate contract bonds as if the state of New Jersey has to make good on them," said Lonegan. "In fact, as the courts have made clear, contract bonds are bonds that are not backed by the full faith and credit clause of the state. Just like with Fannie Mae and Freddie Mac, Moody's is assuming paper is good paper without actually looking at what will happen if there is an inability to pay."

Click here or on the image to check out the video of the press conference: