Fitch Ratings assigns an 'F1+' rating to New Jersey's $1,925,000,000 tax and revenue anticipation notes (TRANs), series fiscal 2010B, selling competitively on Aug. 5, 2009. The notes mature on June 24, 2010. Simultaneously, Fitch affirms the state's general obligation (GO) rating at 'AA-'. The Rating Outlook is Stable.
The notes are not GOs but will be paid from available fiscal 2010 general and property tax relief fund monies. Projected coverage levels, the set-aside provisions, and the governor's power to reduce expenditures and borrow from other funds to maintain balance support the 'F1+' rating.
The state authorized $2.25 billion in notes for cash flow needs in fiscal 2010, $250 million lower than the $2.5 billion authorized for fiscal 2009. The $1.925 billion in notes now offered are equal to 3.7% of cash flow. Funds totaling 75% of the amount due will be set aside two weeks prior to maturity on June 10, 2010; the balance will be set aside on June 23, 2010 one day prior to note repayment. The projected ending cash balances of $1.837 billion on June 30, 2010 provide a cash flow safety margin of 3.6% and are projected to cover note repayment by 1.9 times (x). About $1.35 billion of borrowable resources have been identified by state officials, widening the measure of protection to 2.6x.
New Jersey's 'AA-' GO bond rating reflects high wealth levels (ranking second-highest nationally) and a broad and diverse economy. These economic strengths have been offset by a high debt burden and a multitude of spending pressures, including continuing capital needs, as well as significant unfunded pension and employee benefits obligations. Revenue performance amid the current economic recession has weakened sharply, and the state's limited financial flexibility has necessitated retreat on previous efforts designed to restore structural balance and address the state's long-term liabilities. Given the state's reduced operating flexibility, Fitch expects that the state will continue to promptly address future shortfalls should revenues underpeform estimates. Further, Fitch will continue to monitor the effects of the state's long-term obligations on its operating environment.
Revenue expectations for the recently completed fiscal year 2009 were lowered on several occasions since last fall in response to weak collections. While the adopted fiscal 2009 budget anticipated an overall revenue decline of 0.4%, a large decline of 10.6% from fiscal 2008 levels is now projected. Personal income tax receipts, as of the state's most recent projections, are expected to decline from fiscal 2008 levels by a sharp 18.4%, while sales taxes and corporate income taxes are expected to be 7.4% and 23.2%, respectively, below fiscal 2008 levels. The aforementioned revenue underperformance and additional spending needs necessitated approximately $4.3 billion in balancing measures, some of which relied heavily on non-recurring measures. At present, the state expects to end fiscal 2009 with approximately $735 million in ending balance, slightly higher than the $702 million envisioned when the budget was passed, helped in part by strong response to the state's recent tax amnesty program.
The enacted 2010 budget is approximately $4 billion below the originally adopted fiscal 2009 budget and addresses an $8.2 billion current-level funding gap. A combination of revenue enhancements, federal stimulus monies, restrained growth and spending reductions were employed to close the gap, though reductions in pension funding and savings generated by restructured debt repayment account for a significant portion of the identified cuts. Many of the proposed revenue enhancements result from new personal income tax bracketing affecting the state's highest earners and each are proposed to be in effect for just one year. Other measures reduce property tax relief efforts, an area of pressure for the state. Fiscal 2010 revenue expectations include an overall decline of 1.3% from fiscal 2009 revenues, which were over 10% below those of the fiscal 2008. The state expects 1% growth in personal income tax receipts (though base growth would be negative without the revenue measures) 2.5% growth in base sales tax receipts, and a reduction of 3.3% in corporate tax receipts.
State employment growth coming out of the last recession lagged the national experience. New Jersey non-farm employment levels in 2008 declined by 0.5%, just 0.1% worse than the national decline for the same period. June 2009 employment figures indicate an employment loss of 3.5% over June 2008 levels, compared to the national decline of 4.2% for the same period. State unemployment of 9.2% for June 2009 is just below the national level of 9.5% for the same month. New Jersey's wealth levels are high, with per capita personal income of $50,919 equaling 128% of the national level, second among states. Personal income growth in 2006 and 2007 closely tracked or exceeded the national experience, though 2008 performance was only 82% of the national level.
The state's debt levels are high. The debt burden as of June 30, 2009 equaled 7.6% of preliminary 2008 personal income, and ongoing capital demands for school construction and transportation projects are large. State residents approved in November 2008 a constitutional amendment that requires voter approval for future debt authorizations that do not carry a dedicated repayment source, which Fitch believes may limit future growth in debt levels.
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