By Timothy E. Doherty
Amidst eaction along party lines to Gov. Jon Corzine’s budgetary proposals by legislators and the governor’s chief of staff, the 75 bankers attending the first Bankers Legislative Day on Feb. 13 received three pieces of good news.
First, all four legislators participating in the Legislative Leaders Panel spontaneously agreed to sponsor legislation mandating that a percentage of the money managed by the state’s Cash Management Fund be kept in New Jersey-based banks.
“Yes I would support the legislation,” said Assembly Deputy Speaker Jack Conners, D-7. “I believe that our banks can be competitive. It’s all about interest rates. I think it’s just dumb and bad business to send money out of the state.”
“I would be happy to do that,” said Senate Majority Leader Stephen M. Sweeney, D-3. “In fact, I’ll ask the senate president if he wants to do it. If not, I’m telling you now, I’ll do it right now.”
The other panelists, Assembly Republican Leader Alex DeCroce, R-26, and Senate Minority Leader Thomas H. Kean, R-21, quickly agreed to do likewise.
Second, later in the morning, bankers learned that the Department of Banking and Insurance (DOBI) was close to signing branching agreements with neighboring Pennsylvania and New York that would permit those branches to be regulated by their home state banking departments.
“We have gotten a verbal agreement on that and will be rolling something out with your participation next month,” announced Division of Banking Director Terry K. McEwen.
McEwen said it had taken “about a year and a half of talking to New York and Pennsylvania” to reach that agreement.
Last, during the final presentation of the morning, Dr. James W. Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, put the New Jersey banking industry in a very positive perspective.
“The banking sector is certainly one part of the economy that the Legislature should not ignore – it’s too vitally important to the state economy as a whole,” said Hughes. “And particularly because of the aftershocks of the subprime lending debacle and the global financial crisis to negatively impact New Jersey, its financial activity, its economic activity – and this puts at risk all of the activities that banking finances. So it certainly should deserve legislative priority.”
Budget Battle Begins
Much of the three-hour program, the first of its kind sponsored jointly by NJBankers and New Jersey League of Community Bankers, focused on Gov. Corzine’s asset monetization plan and other components of his Fiscal Year 2008-2009 budget.
“We have created a proposal to pay down some of the state’s debt – actually our goal is to reduce it by 50 percent – as a way of reducing some of our balance sheet problems,” said Corzine’s Chief of Staff Bradley Abelow, referring to the asset monetization program during his opening presentation.
The program would create a Public Benefit Corp. (PBC) that would operate New Jersey’s toll roads and collect gradually increasing tolls from them over a number of years.
“You have to raise tolls to have revenue from this [PBC]. It operates the road, collects tolls, is able to issue debt against those revenues that are expected in the future and we would use those proceeds to do really only one thing, which is to pay down debt,” Abelow said. “Some of that debt will be transportation debt, so that will enable us to use the existing tax dedications for the Transportation Trust Fund and future revenues of this [PBC] together to be able to invest in transportation for a generation – 50 or 75 years – whatever the period they’re talking about.”
Abelow said the state’s options for raising money are limited.
“We have no mechanism for raising capital to address those issues on our balance sheet,” he said. “You all with your banks have the ability to raise capital in a variety of ways. You can go out and sell stock if you’re a public company; an interest if you’re a private company; you can certainly use debt financing if you choose to; if you have a big enough institution, you can think about selling a part of the institution.”
“None of those tools are available to us in government,” Abelow said.
Answering plan critics, Abelow said, “There are people out there saying it’s actually state debt and you’re trading one form of debt for another. I’m going to assume – I’m going to hope – that there’s enough sophistication in this room that you all have seen enough different financing structures to know that in fact you can create structures that are non-recourse to a company, in this case, non-recourse to the state, and that’s what we’ve done with this Public Benefit Corp.”
Freeze and Control
In addition to addressing the balance sheet side of the forthcoming state budget through asset monetization, Abelow said the budget will have three additional components.
“Freeze spending now and I’m saying to you today, we’ll be lucky if we actually have enough revenues to have a budget the same size as last year,” Abelow said. “And there will be extraordinary gnashing of teeth and pain here in Trenton as we deal with the reality of that.”
The second component he said was to “only allow spending to rise at the rate at which our underlying revenues rise.”
Lastly, Abelow said the governor wanted greater controls over bonded indebtedness by ending the issuance of “more state debt in the future without voter approval.”
“We’ve got to do something different, because we’re in a big mess,” Abelow concluded. “We are in that mess. There’s no denying it. And the traditional ways of getting out of it aren’t going to be sufficient anymore. We’ve got to do something different. And if our cynicism is so deep that we aren’t willing to look at doing things different, then there’s no way out.”
Reaction to the governor’s budget plan during the subsequent Legislative Leaders Panel ran along party lines, although none of the legislators endorsed the asset monetization proposal outright.
“The Chamber of Commerce already endorsed this plan that the governor put out – a $40 billion plan, without the bill,” said Sen. Sweeney. “Think about it – you’ve got to at least read it first. I’m not saying I’m opposing it. I’ve got to read it first before I make a decision on something and try and offer something else.”
“The governor should be congratulated for trying to deal with the problems we have in the state,” said Sweeney. “I’ve heard the chief of staff speak about how we’re going to have a serious, serious cut in the budget this year and I think we need to do that. I think that we need to not just cut spending; we need to cut the cost of government.”
Regarding budget cuts, Sen. Kean expressed concern that Corzine will resort to scare tactics to affect budget cuts.
“My fear is that the governor is going to employ what is essentially what they call in Washington, D.C., a Washington Monument Strategy,” said Kean. “When the Department of the Interior’s facing budget cuts, they shut the Washington Monument down – not the park in Alaska, not the park the people don’t usually focus on or the ones that are driving some of the other costs.”
“The Republicans in the State Senate are united saying, ‘Let’s focus on cutting spending first, let’s focus on the structural forms going forward, everything from pensions to constitutional protections on borrowing,’” said Kean. “Let’s work on a bi-partisan basis to get the structural components done as well as the spending cuts.”
“I’ll be very honest with you, I have concerns about it,” Assemblyman Conners said of the monetization plan. “There are people out there who are just barely getting by. Even the most minor increase, whether it’s in a toll or it’s in the cost of riding a bus – it has an impact on them. So I’m keeping my mind open on this, I’m listening to everyone; I’m listening to the governor. I realize how critical it is. We’ve got to do something about it.”
“This governor likes to advocate the fact that he’s transparent,” said Assemblyman DeCroce. “He’s not transparent at all.
“The fact of the matter is he’s put one study on the Internet pertaining to this increased toll hike program of his,” DeCroce continued. “And all the other studies are in his back pocket.”
“Everybody says to the Republicans, ‘Where’s your plan?’ Well I’ll tell you where our plan is,” DeCroce said. “We don’t have a plan. Why don’t we have a plan? He’s had 18 months and $11 [million] to $12 million to spend on that plan. We’ve had it for just about 30 days.”
“He is going to come out with Draconian cuts, I’ll tell you right now. He’s going to try to blackmail not only the Legislature but the public into thinking his monetization program is the best thing that happened since Dairy Queens.”
Panel Moderator Patrick L. Ryan, chairman of Hopewell Valley Community Bank, next tried to focus the legislators on economic development. But the conversation frequently strayed back into discussion of the governor’s budget.
“We need to have a comprehensive economic redevelopment strategy that’s going to impact every single sector of this economy,” said Kean. “We can do that in state government by abolishing the Department of Commerce, and have a new and expanded Economic Development Authority.”
Taxes are the key to economic development says Conners.
“If you want to attract businesses into New Jersey, that’s the first thing they’re going to look at, whether it’s the business tax or it’s a high-income individual looking at the income tax structure,” Conners said.
Banks, says Conners, are also part of that mix.
“I know from experience it is the banker that is making that very small loan that may set up a hairstylist or something,” the assemblyman said. “They may be able to put someone in business that small. You make it happen, and we have to protect you and make sure that you survive.”
Much of Banking Director McEwen’s presentation concentrated on subprime lending.
“There are no state-chartered institutions that have participated in the subprime issue at all,” McEwen said. “So it’s mainly the mortgage banking and mortgage brokerage industries throughout the nation, as well as in New Jersey, that have actually done most of the subprime lending.”
“But as a result of subprime lending, we have a ripple effect that is cascading through our economy,” he said. “We now in the state have fewer lenders, fewer funding sources and skeptical investors – which means fewer options for potential homebuyers and thus a pooling of the real estate market.”
McEwen thanked NJBankers and the New Jersey League of Community Bankers for partnering with the Department of Banking and Insurance in its consumer outreach efforts concerning subprime lending through the New Jersey Home Ownership Preservation Effort – NJHOPE.
He offered bankers some strategic marketing advice.
“This is an opportune time for the banking industry to recapture some of what was lost in the ’90s to the mortgage banking industry,” McEwen said. “People are very concerned now with their mortgage and mortgage products. They trust banks implicitly.”
“So this is a chance for you to get your advertising and marketing people out and really talk up your mortgage products, because people are very concerned and nervous about the mortgage products they currently have,” he said.
The State of Banking in New Jersey
McEwen provided a positive view of the New Jersey banking industry.
“Asset quality remains strong. Loan volumes are flat, earnings are flat but positive,” he said. “And there were approximately a dozen new de novo bank startups in 2007. We do see that slowing in 2008.”
He said his department takes a proactive approach to banking regulation.
“In order to foster and add value to the state charter, the department regularly reviews all the legislative and regulatory issues, whether they’re just up for renewal or whether it’s new legislation,” McEwen said. “And there’s an open line of communication, as well as dialog, with your trade association.”
McEwen listed a number of new laws and regulations that DOBI is pursuing, including:
A new usury bill;
A mortgage processing bill;
An amendment to modernize banking advertising law and an advertising regulation;
A servicer bill to tie services into the mortgage process;
A currency exchange bill;
A residential realty bill and regulation;
A rating system for money services bureaus;
A mobile branching bill; and
Several bills regarding the licensing of mortgage solicitors.
In response to a question from a conference attendee, even though the banking division is self-funded, McEwen said his department expects to be impacted by cuts in the budget Gov. Corzine will present to the Legislature and “will make sure cuts work for the industry.”
Dollars and Cents
The morning concluded with an economic presentation by Dr. Hughes, who described banking as “a critical sector.”
“It provides much of the capital for the state’s economic expansion and it particularly fuels the state’s construction activity,” Hughes said. “By itself, not including the economic activity that it finances, banking accounts for $14.4 billion of the state’s total domestic product, or GDP. That represents 3.4 percent of the state’s total GDP.
“In 2007, employment in banking totaled 82,000 payroll jobs, and that is 2 percent of the state’s total employment,” he said. “Moreover, employment in banking has been growing faster than the state as a whole. Between 2003 and 2007, total employment in New Jersey increased by 3 percent. At the same time, banking employment increased by 4.8 percent.”
“Of equal significance is the quality of banking jobs,” Hughes continued. “The average annual pay of all jobs in New Jersey is $52,000. The average annual pay in banking is $66,000 – 27 percent higher than the statewide average.”
“So banking is not only a growing sector in the New Jersey economy; it is providing jobs that are significantly above average in pay level and obviously significantly above average in terms of tax-paying ability,” he said. “And it is a sector that many other parts of the economy depend on. Banks are the single most important supplier of credit and this obviously supports job creation and economic growth. It has often been asserted that banks are the lubricant that keeps the many parts of the economy moving, and that is certainly true.”
Timothy E. Doherty is vice president and director of communications for NJBankers. He can be reached via e-mail at email@example.com.