TEXT-Fitch rates NY Economic Development Auth
Sept 14 - Fitch Ratings assigns an 'A+' rating to the following New Jersey Economic Development Authority (NJEDA) school facilities construction bonds: --Approximately $136.88 million school facilities construction bonds, series KK; --Approximately $24.37 million school facilities construction refunding bonds, series MM (Federally Taxable); --Approximately $119.06 million school facilities construction notes, series G (SIFMA Index Notes); --Approximately $119.06 million school facilities construction notes, series H (SIFMA Index Notes). The construction notes will bear interest at a floating rate based on a fixed spread, established at pricing to the SIFMA Index. The bonds and notes are expected to sell via negotiation on Sept. 18, 2012. In addition, Fitch affirms the following ratings: --$8.3 billion outstanding NJEDA obligations at 'A+'; --$2.38 billion outstanding general obligation (GO) bonds at 'AA-'; --The 'A+' ratings on the state's appropriation-backed debt and other related debt as detailed at the end of this release. The Rating Outlook is Stable. SECURITY The bonds are special, limited obligations of NJEDA; debt service is paid under a state contract between the state treasurer and the authority subject to annual legislative appropriation. KEY RATING DRIVERS APPROPRIATION OBLIGATION OF THE STATE: State contract payments provide for debt service; payments must be appropriated annually by the State Legislature, resulting in a rating one notch below the state's 'AA-' GO bond rating. DEBT AND UNFUNDED LIABILITIES ARE CONSIDERABLE: Debt levels have increased over the past decade or so due to the issuance of pension bonds, deficit bonds, and for transportation and court-ordered school capital needs. Outstanding debt obligations are compounded by significant and growing funding needs for the state's unfunded pension and employee benefit liabilities. CONTINUED PENSION LIABILITY WEAKENING: Despite recent, significant action to contain future growth in the state's accumulated pension liability, continued funding level deterioration is projected through the medium term as full funding of the actuarially required contributions is several years off, resulting in sizeable planned increases in annually required contributions. SLOW ECONOMIC RECOVERY: New Jersey benefits from a wealthy populace and a broad and diverse economy. The state's economic performance continues to lag the nation in recovery from the recent recession. The unemployment rate remains above national averages. BUDGET REMAINS STRUCTURALLY IMBALANCED: Management has proactively responded to past revenue weakness and growth in state spending has been contained. Nevertheless, the state's budget remains structurally imbalanced as full funding of annual pension obligations is several years off. Reserve balances are expected to remain narrow, offering limited flexibility to absorb unforeseen needs. CREDIT PROFILE The 'A+' rating on the bonds and notes reflects New Jersey's ability to service appropriation-backed debt. The bonds and notes are payable solely from state contract payments between the state treasurer and the authority. The payments are equal to debt service and are subject to annual legislative appropriation. The state legislature initially authorized $8.6 billion of school bonds primarily to meet capital requirements pursuant to the New Jersey Supreme Court holding in Abbott versus Burke regarding the adequacy of school funding. In 2008, an additional $3.9 billion in school bonds was authorized to continue the program. Over $8 billion, exclusive of refunding bonds, has been issued to date. The majority of proceeds from the current sale will finance construction projects for elementary and secondary education facilities in the state while the series MM bonds will refinance outstanding school facilities construction bonds for debt service savings. The current SIFMA index issues have hard serial maturities and there is no put risk or renewal risk to the NJEDA. New Jersey's 'AA-' GO credit rating reflects its high wealth levels and broad economy, 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. Despite passage of pension and benefits reform legislation which will restrain future growth in the state's accumulated liabilities, continued pension funding level deterioration is projected through the medium term as full funding of the actuarially required contributions is phased in over several years, resulting in sizeable, planned increases in annually required contributions. Fitch believes that meeting the requisite increases in pension contributions will be challenging and is likely to conflict with other long-term challenges, such as property tax relief, school funding, and infrastructure needs. Fiscal 2012 is currently estimated to have had $744 million (2.6%) in revenue growth above fiscal 2011 levels and an ending fund balance of $570 million that is a decrease from the opening year balance of $873 million and lower than the $640 million that was anticipated. The estimated ending fund balance of $570 million is expected to be reduced by an as yet undetermined number, largely reflecting lower than expected revenues. Budgeted appropriations for fiscal 2013, which began on July 1, 2012, are approximately 4.5% above estimated fiscal 2012 spending. Local education spending grows by $1.1 billion and the use of one-time measures, inclusive of balance draws and expected debt restructuring, is similar to the prior year at about 4% of budget, though this figure excludes the statutorily reduced pension contribution appropriated at two-sevenths of the actuarially required level for fiscal 2013. The state projects robust revenue growth in fiscal 2013 of $2.3 billion (7.9% above estimated 2012 levels) reflecting projected personal income tax (PIT) growth of 7.9%, sales tax growth of 4.7%, and an expected 10.9% increase in corporate tax receipts. Given the current level of economic uncertainty and recent modest growth in actual revenues, Fitch believes there is notable downside risk to the revenue forecast, although if fiscal 2013 collections come in below projections, Fitch expects the state would revise appropriations accordingly. As presented, the state expects to close fiscal 2013 with an ending balance of $648 million, about 2% of budgeted expenditures, an estimate likely to be reduced following an expected downward adjustment to the ending fund balance in fiscal 2012, currently estimated at $570 million. State employment growth during most of the last decade lagged the national experience and while growth has returned following losses due to the recession, the pace of expansion remains below the national average. The state recorded a decline of 1.1% in non-farm employment levels in 2010, slightly higher than the 0.7% contraction seen nationally, and growth in 2011 was relatively flat to 2010 and below the 1.1% national growth rate. Year-over-year employment growth as of July 2012 was 1% above prior year levels, just below 1.4% national growth for the same period. State unemployment of 9.8% for July 2012 is above the national level of 8.3% for the same month but largely reflects an increase in the labor force rather than a loss of employment. New Jersey's wealth levels are high, with preliminary 2011 per capita personal income of $53,181 equaling 128% of the national level, ranking third among the states. Preliminary personal income growth of 4.2% in 2011 was below the national growth rate of 5.1%, following almost equal gains in 2010. New Jersey's debt levels are high for a U.S. state and ongoing capital demands for school construction and transportation projects remain large. Net tax supported debt as of June 30, 2012 equaled 7.8% of preliminary 2011 personal income. 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 will limit growth in debt levels. As of June 30, 2011, the state's portion of pension liabilities, reflective of pension reforms and a change in plan assumptions, was 60.8% funded on an aggregate basis. System-wide funding levels for the PERS and TPAF systems - using Fitch's more conservative 7% discount rate assumption - are weak at 61% and 59%, respectively. While pension and employee health benefit reforms have been implemented and are expected to slow the growth in liabilities, the state's plan to phase in full funding of its annually required pension contributions over a seven-year period will likely reduce funding levels in the near term and add stress to the state's operating budget. On a combined basis, New Jersey's net tax-supported debt and unfunded pension obligations attributable to the state, as adjusted for a 7% return assumption, total 16.3% of 2011 personal income, well above the 6.6% median for states rated by Fitch. As noted above, Fitch affirms at 'A+' the ratings and Stable Outlook on state appropriation-backed debt issued through the following authorities: New Jersey Economic Development Authority New Jersey Health Care Facilities Financing Authority New Jersey Educational Facilities Authority New Jersey Sports and Exposition Authority New Jersey Building Authority Further, Fitch affirms the 'A+' rating and Stable Outlook on the State of New Jersey's outstanding certificates of participation.
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