Whether it’s transportation finance, con-structing next year’s budget, or open-space preservation, the talk inNew Jersey hangs on how the state can pay down its $32 bil-lion of outstanding debt and what it can do to curb unnecessary future borrowing.

For more than a year, lawmakers have been debating New Jersey’s high debt burden, which takes up nearly 8% of the yearly budget in debt service payments. Voters sent Democratic Gov. Jon Corzinea strong message in November when they rejected a $450 million stem cell bond bill and passed a $200 million open-space bond initiative, typically a very popular issue, by a relatively a tight margin.

If that wasn’t enough, legislators from both parties in February failed to embrace the governor’s debt restructuring proposal, which would boost tolls substantially by 50% yet also pay down half of the state’s outstanding debt and help finance trans-portation infrastructure for 75 years with a nearly $38 billion debt issuance backed by toll increases of 50%.

Instead of taking up the complex Cor-zine debt defeasance strategy, a common phrase began to resonate again and again in media interviews with lawmakers, op-ed pieces, and online blogs — cut state spending.

And that’s just what Corzine did. His fiscal 2009 budget, which begins July 1, includes $2.7 billion of cuts to bring the operating budget to $33 billion, $500 mil-lion less than the current budget. If the Legislature is able to curb its traditional last-minute spending and keep the fis-cal plan at $33 billion, it would be the first time since 1951 that New Jersey has passed a budget for the coming fiscal year that is smaller than the current year.

Local governments and municipali-ties will feel the reductions in state grants and aid, with Corzine’s budget propos-ing $1.35 billion less to cities, towns, and counties. Joseph Doria, Commissioner of the Department of Community Affairs, said smaller governments will need to find creative ways to address the funding shortage, including sharing or consolidat-ing among local governments programs such as fire departments and sanitation services.

"It’s obviously going to impact the municipalities, especially the small ones, which is really an effort to encourage them into shared services and possible consoli-dation," Doria said.

Within the Depart-ment of Community Affairs is the Lo-cal Finance Board, which gives final ap-proval to local gov-ernments for bond transactions. Fewer state funds will con-strain municipal op-erating budgets, and Doria stressed that borrowing for capital projects will continue, but the state will not support issuing debt to help balance tight local budgets.

"Obviously we’re not going to, in any way, approve the use of bonding for recur-ring expenses," Doria said.

Dennis Enright, principal at NW Fi-nancial Group, said less financial help from the state probably would not halt current capital projects at the local level, although municipal officials may work out debt service payments to increase over time to help alleviate debt service costs in the near term.

"If they have a project that they have on the books that they’re looking at, I suspect they’d probably proceed with that project even in light of the budget, because if they don’t, the costs go up by a lot more due to galloping costs of construction, which are about three times inflation," Enright said. "If they already have a project, they’d probably do it. They would probably capi-talize interest and sort out a debt service schedule they can absorb into the future."

While Republicans claim there could be more cuts to the fiscal plan, many Demo-crats say they do not expect to pass a 2009 budget that is smaller than $33 billion. Yet the general consensus is to work on next year’s budget before voting on Corzine’s debt restructuring plan or its alternative, a financing proposal that Assemblyman John Wisniewski, D-Middlesex, chair-man of the Transportation and Public Works Committee, crafted in response to the governor’s plan.

Wisniewski’s strategy includes lower toll hikes than Corzine’s 50% proposal, gas tax increases, and possibly sell-ing or leasing the state lottery. While the governor’s plan involves new toll-backed debt to pay down outstanding state appropriation debt, Wisniewski’s proposal does not include new debt is-suance but pays down existing debt with new and increasing revenues.

"The plan the governor proposes re-ally refinances debt. It takes debt off the state books by creating debt elsewhere, and that’s my major disagreement with the governor’s plan as presented," Wisniewski said. "If we found money, for example, if we were to do something with the lottery and if we were going to get new revenue in that we could use to reduce debt, that’s how we should approach this. Simply by taking out new debt to refinance old debt, I’m not sure is the smartest way to proceed."

To help limit future borrowing, two measures sit in the Legislature, one that would constitutionally require voter ap-proval for all state-backed debt without a defined revenue stream and another that would statutorily restrict state expenditures to match revenues, thereby eliminating the use of one-time revenues to balance oper-ating budgets.

Debt service accounts for nearly 8% of the state’s operating budget, with debt ser-vice payment to reach $2.8 billion in 2009, an increase of $100 million compared to 2008. Officials would like to decrease that amount to make room in the budget for needed projects and rising costs in government such as health care liabilities. In addition, like other states, New Jersey, will face a softening economy as officials anticipate revenues to increase by a mod-est $500 million, or just 1.5% over current revenues.

Other stresses to economy include housing foreclosures due to homeowners not meeting rising mortgage payments on their subprime loans, in particular in the state’s urban areas.

In response, the New Jersey Hous-ing and Mortgage Finance Agency in October began an initiative to counsel subprime homeowners and help them with their financing options. Another result is that more first time homebuyers used the HMFA to help finance their homes, with the authority closing on more than 2,100 single-family mortgages in 2007, more than double the amount of single-family home loans it worked on the year before, according to executive director Marge Della Vecchia.

"There’s clearly a flight to quality be-cause we’ve been busier than we’ve ever known and that’s a good thing, because many of them who were in these subprime mortgages should have been our borrow-ers," Della Vecchia said. "I’m sure they could have been, but for whatever reason they were lured to another avenue."