Fitch Ratings affirms the State of New Jersey's outstanding $2.6 billion general obligation (GO) bonds at 'AA'. The Rating Outlook is Stable.
RATING RATIONALE:
--New Jersey benefits from high wealth levels and a diverse economy.
--Management has shown a willingness to take action to maintain fiscal balance amid significant revenue declines, though one-time measures continue to be among balancing solutions. Thin reserve levels provide limited financial flexibility should revenues weaken further.
--Long-term obligations are significant; pension obligations are not being funded during the downturn.
--Debt levels are high, and large school construction and transportation needs remain.
KEY RATING DRIVERS:
--Continued timely efforts to maintain budgetary balance amid the economic recession;
--Action to contain large long-term liabilities as budgetary conditions stabilize.
SECURITY:
The bonds represent general obligations of the state, with faith and credit pledged.
CREDIT SUMMARY:
The state's 'AA' GO bond rating reflects high wealth levels (ranked 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 economic recession weakened sharply, and the state's limited financial flexibility has necessitated a retreat on previous efforts designed to restore structural balance and address long-term liabilities. Despite the state's reduced operating flexibility, the rating assumes that it will continue to take actions necessary to maintain budgetary balance. Further, Fitch will continue to monitor the effects of -term obligations on its operating environment, particularly given that the elimination of pension funding has been significant part of budget balancing measures in recent years.
Revenue expectations for fiscal year 2009 were lowered on several occasions in response to weak collections. While the adopted fiscal 2009 budget anticipated an overall revenue decline of 0.4%, a large decline of 11.3% from fiscal 2008 levels was recorded. Personal income tax receipts declined by 16.9%, while sales taxes and corporate income taxes were 7.3% and 13%, respectively, below fiscal 2008 levels. The revenue underperformance and additional spending needs necessitated approximately $4.3 billion in balancing measures, many of which were non-recurring. Fiscal 2009 closed with an ending balance of approximately $614 million, $121 million lower than the estimate upon which the fiscal 2010 budget was based.
The enacted fiscal 2010 budget was approximately $4 billion below the originally adopted fiscal 2009 budget and addressed 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 accounted for a significant portion of the identified cuts. The majority of the proposed revenue enhancements resulted from new personal income tax bracketing affecting the state's highest earners which are scheduled to be in effect for just one year. Other measures reduced property tax relief efforts, an area of pressure for the state. Enacted fiscal 2010 revenue expectations assumed an overall decline of 1.3% from fiscal 2009 revenues; however, revenue underperformance and supplemental spending needs opened a $2.35 billion gap as the year progressed. A mix of spending reductions and balance draws totaling just over $2 billion, inclusive of $461 million in mid-year school aid funding reductions, and approximately $280 million in new revenue items were employed to maintain balance. The state closed fiscal 2010 with an ending balance of approximately $505 million.
The adopted fiscal 2011 budget addressed a $10.7 billion current-law funding gap without broad based tax increases and with significant spending reductions, though a large portion of the gap is closed by forgoing the state's $3 billion pension contributions which will exacerbate future budgets and stress already weak funding levels. The budget assumes overall revenue growth of 1.5%, while budgeted appropriations across all funds decline by 1.4%. The budget included funds expected through an extension of enhanced FMAP funding. Personal income tax revenues are projected to decline by 3.8%, reflecting in part the sunset of last year's temporary tax increases, while sales tax and corporate income tax revenues are expected to grow by 6.1% and 6.3% respectively. The projected ending balance of $303 million, representing just over 1% of fiscal 2011 revenues, provides limited flexibility should revenues underperform estimates.
State employment growth coming out of the last recession lagged the national experience. New Jersey non-farm employment levels declined by 0.7% in 2008 and by 3.9% in 2009, levels consistent with national declines. New Jersey employment continues to contract, with June 2010 employment 0.8% below June 2009 levels, compared to a U.S. decline of 0.1% for the same period. State unemployment of 9.6% for June 2010 is just above the national level of 9.5% for the same month. New Jersey's wealth levels are high, with per capita personal income of $50,313 equaling 129% of the national level, second among states. Personal income growth in 2006 and 2007 exceeded the national experience, though 2008 performance totaled only 87% of the national level and 2009 preliminary growth was slightly above the national rate.
The state's debt levels are high. The debt burden as of June 30, 2010 equaled 8% of preliminary 2009 personal income. Excluding bonds issued for pension funding, outstanding debt as of June 30, 2010 totaled 7.5% of 2009 personal income. Ongoing capital demands for school construction and transportation projects remain 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. As of June 30, 2009, the state's pension systems were 62% funded on an aggregate basis.
Related Research:
'Tax-Supported Rating Criteria', dated Aug. 13, 2010;
'U.S. State Government Tax-Supported Rating Criteria', dated Dec. 28, 2009.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Additional information is available at 'www.fitchratings.com'.
Related Research:
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493048
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
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Contacts:
Fitch Ratings, New York
Primary Analyst
Kenneth T. Weinstein,
212-908-0571
Senior Director
One State Street Plaza, New York,
NY 10004
or
Secondary Analyst
Laura Porter, 212-908-0575
Managing
Director
or
Committee Chairperson
Douglas Offerman,
212-908-0889
Senior Director
or
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Cindy
Stoller, 212-908-0526
Email: cindy.stoller@fitchratings.com