AFP takes Debt message to Wall Street

Lonegan Protests Moody’s Too-High Rating of “Junk” New Jersey Contract Bonds

Americans for Prosperity Says Rating Begs Another Fannie-Freddie Catastrophe

WASHINGTON — 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 ATM machine, 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 company to lower its rating and thus stop enabling the state of New Jersey from plunging 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. The letter asserts that New Jersey contract debt should accurately reflect the substantial risk of default it carries:

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.

Lonegan filed suit Monday against New Jersey to block a $3.9 billion borrowing scheme from being pushed through without voter approval. Article 8 of the state 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 state 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.

“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 affirmed, contract bonds are not backed by the full faith and credit of the state. Just like with Fannie and Freddie, Moody’s is assuming paper is good paper without actually looking at what will happen if there is an inability to pay.

Americans for Prosperity (AFP) is a nationwide organization of citizen leaders committed to advancing every individual’s right to economic freedom and opportunity. AFP believes reducing the size and scope of government is the best safeguard to ensuring individual productivity and prosperity for all Americans. AFP educates and engages citizens in support of restraining state and federal government growth and returning government to its constitutional limits. For more information, visit

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