TEXT-Fitch affirms Jersey City unlimited tax GOs
July 27 - Fitch Ratings has affirmed the city's unlimited tax general obligation (ULTGO) bonds as follows: -$163 million outstanding ULTGO bonds series 2002A&B, 2003, 2003B&C, 2010B&C at 'A-'. Fitch affirms the `A-' underlying rating on $154 million outstanding ULTGO bonds various series which benefit from the New Jersey Municipal Qualified Bond Act. Fitch has withdrawn the 'A-' rating on Jersey City (NJ) qualified general improvement bonds series 2010A as the bond was not sold. The Rating Outlook is Stable. SECURITY The bonds are general obligations of the city secured by the city's full faith and credit and its ad valorem tax, without limitation as to rate or amount. KEY RATING DRIVERS IMPROVED BUDGETARY BALANCE: The city has made progress over the past two years in achieving structural balance despite heightened financial pressures. While budgetary pressures are expected to continue and overall reserves are modest, excess levy capacity and expenditure cuts should enable the city to maintain balance. LOW FINANCIAL RESEVES: Fund balance reserve levels for calendar 2011 are low at under 3% of budget. Strengthening reserves much beyond current levels is not expected. SOUND ECONOMIC BASE: The city is advantageously located proximate to New York City, with numerous modes of transportation. The local residential and commercial tax bases are rebounding from valuation declines following the peak in 2007. City wealth and income levels are increasing but continue to trail the state and national averages. HIGH FIXED COSTS: The city's combined costs for pensions, other post-employment benefits (OPEB), and debt service are high at 25% of CY 2011 total expenditures and will continue to pressure its operating position. Pension and OPEB payments are well below actuarially-based levels. City overall bonded debt levels are moderate at $3,464 per capita and 4.6% of equalized valuation. CREDIT PROFILE: REBOUNDING ECONOMY Jersey City, NJ is advantageously located across the Hudson River from downtown Manhattan with easy access via numerous modes of transportation. City population has been growing steadily at 3 - 6% annually since 1980 to 247,597 in 2010. Due to the city's proximity to New York City, employment in the finance, insurance, and real estate (FIRE) sector exceeds state and national averages. Leading employers include Goldman Sachs with 3,000 employees, Pershing, LLC (2,121), JP Morgan Chase (1,576), Citigroup (1,500) and Merrill Lynch (1,500). Depository Trust Company will move 1,600 positions to the city from New York City by 2013. Per capita income levels have been increasing over the past few years given the higher paying FIRE employment but for 2011 remain slightly below state averages at 88%. Citywide unemployment rates are above average at 10.6% for May 2012 compared to 9.2% for the state. VALUATION DECLINES The city has faced significant property valuation declines over the past five years resulting in the issuance of over $30 million in debt to fund tax appeals. Recently resumed development activity coupled with a city-wide property revaluation in 2013 is expected to stabilize valuations. The city has been aggressive with economic development incentives, resulting in a significant amount of properties in 15-year tax abatements. As a result, municipal revenues from payments-in-lieu-of-taxes totaled $100 million in CY 2011 covering 35 major commercial properties with total development value over $3 billion. These abatements, coupled with the 2% property tax levy cap, constrain the city's ability to increase revenues through property taxes. Property tax collections are consistently over 98.5%. IMPROVED BUT VULNERABLE FINANCIAL PERFORMANCE The city's financial performance improved over the past two years but remains vulnerable. Consistently late introduction and passage of budgets makes officials' ability to anticipate and respond to shortfalls challenging although officials have taken strong measures during this fiscal year to reduce costs. The city changed its fiscal year end in 2010 to December 31 from June 30. Beginning in fiscal 2010 (ending June 30, 2010), the city enacted significant reductions in personnel costs resulting in 300 layoffs and 24 furlough days. Despite the expenditure reductions, the city generated an operating deficit of over $12 million and ended the fiscal year with a low $4.3 million (0.9% of spending) current fund balance. Audited results for the truncated 2010 period (July 1-December 31) indicate a net operating surplus of $7.6 million which, in addition to a $9.3 million emergency appropriation note issuance to fund severance liabilities paid in fiscal 2010, increased fund balance to $21 million. Unaudited results for 2011 indicate a small $3 million net operating deficit with fund balance at $18 million or a low 2.7% of annual expenditures. The proposed 2012 budget reflects continuing expenditure savings from contract and benefit changes and modest revenue increases from PILOTS and other fees and is not expected to be formally approved until July 2012. The city reports that it has negotiated several of its expired labor contracts for police and fire to include a shift to a less costly medical plan and increased co-payments. MODERATE DEBT, HIGH FIXED COSTS Overall debt totals $3,464 per capita or 4.6% of equalized value. Overall fixed carrying costs including state and city pensions, OPEB, and debt service are high at $120 million total or 25% of budget in CY 2011. Given the low current funding levels for the state (54%) and city pension (42%) plans and the very high OPEB accrued liability ($908 million), the city's carrying costs would nearly double if funding levels were increased to the actuarial required contribution. Despite recent contractual and benefit changes, pension (accrued liability not available) and OPEB (unfunded actuarial accrued liability of $908 million as of July 1, 2008) costs are expected to continue to pressure future budgets. The city's 2006 - 2014 $130 million capital improvement plan (CIP) is manageable and is expected to be primarily debt funded. Future debt levels are not expected to increase significantly given the rapid amortization of over 70% within ten years. Debt on behalf of Jersey City's school district is currently issued and funded by the state. The city's school district is considered an Abbott district for state funding purposes, indicating its tremendous need for increased funding and educational improvements. Fitch's calculation of Jersey City's debt burden excludes as self-supporting a city GO backup pledge on approximately $210 million Jersey City Municipal Utility Authority (MUA) debt. The city has never paid debt service on bonds supported by MUA revenues and annual water and sewer rate increases through fiscal 2015 are designed to ensure MUA's continued self-sufficiency.