Urban Times News
By Steven Glazer, E-mail: sglazer@urbantimesnews.com

Jersey City-Investment banking giant Goldman Sachs directed a letter endorsing the Cunningham administration's debt restructuring transaction to City Council President L. Harvey Smith with copies to all council members. The council opposition bloc, made up of HCDO supporters employed by Hudson County and led by County Chief of Staff William Gaughan, also a council member, responded by defeating, 6 to 3, for the second time, legislation enabling the transaction to go ahead.

The letter written by Goldman Sachs Managing director Judah Sommer urged the execution of the transaction. "In the opinion of our municipal bond professionals, the proposed restructuring provides valuable budgetary relief during the next ten years, and is a reasonable approach to more closely aligning future debt service with available revenues. They note that in this period of generalized economic weakness, many local and state governments have executed similar transactions to achieve budgetary savings in times of fiscal stress. Accordingly we are supportive of the restructuring plan." The full text of the letter is reproduced in this edition.

The letter is tantamount to what is known in finance as a "fairness opinion," in that it does the same thing as a fairness opinion. Goldman Sachs, though one of the premier broker dealer organizations in the world has no direct involvement in the transaction. The proposal was crafted by a group of investment banking firms headed by Bank of America, working under the direction of Jersey City's Financial Advisor at the time, Charlotte Knight Marshall.

Had Jersey City officials engaged Goldman Sachs to render such an opinion, the giant brokerage firm would have charged a fee based on the size of the transaction, which is usual and customary practice in the investment banking business. The proposed transaction calls for a sale of about $300 Million in bonds so a fee of even a fraction of one percent would have resulted in a charge of several hundred thousand dollars and easily well beyond that.

The letter was written after a presentation by Mayor Glenn Cunningham and Business Administrator Carlton McGee of the proposed debt restructuring transaction to business leaders the day before the council meeting and arrived prior to the meeting. Business leaders at that meeting generally expressed dismay at the council's refusal to approve the measure. The Goldman Sachs managing director had the proposal analyzed by Goldman's Municipal Finance Department after being given copies of the extensive data supporting the presentation made by Cunningham and McGee. That analysis resulted in the conclusions in Sommer's letter urging the implementation of the proposal.

A few days prior to Cunningham's meeting with the city's business leaders, one of the Big Three bond rating services, Fitch's Ratings, said that there was a chance of a downgrade of the city's bond ratings if the transaction, or one like it were not done soon. Previously the proposal had been commended by New Jersey State Treasurer John E. McCormack. Before that the proposal had also been commended and approved by the state's Local Finance Board.

But the Council at their meeting later on the same day the letter arrived, was not even scheduled to consider the restructuring plan or any other financial transaction for the city. Council member Viola Richardson made a motion to introduce the measure to the agenda. But after a second by Council Member Steven Lipski, putting the matter before the council for a second vote in as many weeks, the council again voted it down by the same 6 to 3. Only Richardson, Lipski, and Council Member Jeremiah Healey voted in support. Six votes are needed to approve the ordinance.

The proposal's defeat leaves the city with the alternatives of either raising taxes drastically, or slashing city payrolls, or some combination of the two that would produce enough savings to cover a looming shortfall of about $20 Million in Spring of 2004. City finance officials have produced a schedule of debt service payments showing that the budget shortfall would zoom to more than double that in 2005, and worse yet in 2006 before any let up. Business Administrator McGee has said that this was exactly the crunch that the restructuring transaction was designed to avoid.

Yet council members opposed to the Cunningham administration have seized on the opportunity for political advantage, in effect holding taxpayers and city workers hostage. At this time, there is also no other proposal under consideration and negotiations between the council and the administration have apparently stalled. McGee has repeatedly made statements to council members both in public meetings and privately that delays are costing taxpers millions of dollars in lost savings. McGee's statements to the council have apparently had little effect.

During the meeting numerous speakers exhorted the council to take action and to avoid draconian tax increases or layoffs, also with little effect. The dialogue deteriorated to the point where Council opposition leader William Gaughan outright lied saying that he never once said he was in favor of a tax increase.

Gaughan is on record with administration officials during one negotiating session when he said that he would back the plan, provided Cunningham implement a tax increase along with it.

Gaughan is also on record telling another high-ranking administration official that he would never back the plan because it would virtually guarantee Cunningham's reelection. Gaughan is Chief of Staff to the County of Hudson and is a ranking member of the Hudson County Democratic Organization, Cunningham's political adversaries. The combination of the two posts give Gaughan the influence to control the majority of the council against any initiative by Cunningham.

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