New Jersey rating cut while Arizona outlook negative

SAN FRANCISCO Wed Feb 9, 2011 6:47pm EST

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SAN FRANCISCO (Reuters) - Standard & Poor's on Wednesday cut New Jersey's bond rating a notch due to an unfunded pension shortfall and high debt, while Moody's Investors Service warned Arizona of a possible downgrade by revising its outlook on the state to negative from stable.

Concerns are mounting about the finances of state governments. Some in Congress have even suggested legislation to allow states to declare bankruptcy to help them put their finances in order.

State governments continue to struggle with the effects of the 2007-2009 recession. Their revenue remains weak and altogether they face budget deficits of at least $100 billion for the next fiscal year, beginning for most in summer.

S&P's action turns up the heat on New Jersey Governor Chris Christie. S&P downgraded New Jersey to AA-minus from AA two weeks before the Republican governor proposes his own fix for the state's shaky finances.

President Barack Obama is expected to propose some financial relief for states in his budget plan but Republican lawmakers say there is no support for the kind of rescue mounted for states in the $814 billion economic stimulus approved by the Democrat-run Congress in 2009.

The states' financial woes have prompted some investors in the $2.8 trillion U.S. municipal bond market to dump state debt.

New Jersey ranks near the top of municipal bond issuers with the widest spread over Municipal Market Data's benchmark AAA-scale for their 10-year bonds, indicating investors already see it among the riskiest U.S. states for buying new debt.

"The lower rating reflects our concern regarding the stresses from the state's poorly funded pension system, substantial post-employment benefit obligations and above-average debt levels," Standard & Poor's Ratings Services credit analyst Jeffrey Panger said in a report.

Christie last year cut a huge deficit without raising taxes. But fiscal monitors have faulted him for skipping billions of dollars in contributions to the state pension fund. New Jersey has a $31 billion unfunded pension liability, according to Moody's Investors Service.

S&P's downgrade of New Jersey marks the first time it has downgraded a U.S. state since announcing new criteria in January that it said would better incorporate debt, pension, and other post-employment liabilities such as healthcare benefits into rating decisions, the rating agency said.

"Nothing is new except that S&P changed its criteria on weighting pension funding," said Richard Larkin, director of credit analysis at Herbert J. Sims & Co. "New Jersey's finances have been less than stellar for nearly the entire decade."

ARIZONA'S RISKY WAIVER BID

Moody's Investors Service affirmed its Aa3 issuer rating for Arizona, but revised its outlook on the state to negative, citing uncertainty around its loss of stimulus dollars and its plea to get out from federal healthcare costs.

Moody's said it is concerned about a state sales tax increase that will expire and that it has doubts about Governor Jan Brewer's request for a waiver from federal Medicaid rules to cut spending.

Brewer is seeking a waiver from the U.S. government to suspend Medicaid eligibility for certain non-disabled adults. Savings from a waiver would provide $541 million to put toward Arizona's $1.15 billion projected budget shortfall.

"Approval of the waiver is beyond the control of state government and is uncertain in the current political environment," Moody's said in a statement.

(Reporting by Jim Christie in San Francisco, Lisa Lambert in Washington and Joan Gralla and Edith Honan in New York; editing by Mohammad Zargham)

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