TEXT-Fitch affirms Jersey City unlimited tax GOs

Fri Jul 27, 2012 3:48pm EDT

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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Fitch has withdrawn the 'A-' rating on Jersey City (NJ) qualified general 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.
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