TEXT - Fitch rates New Jersey's tax & rev anticipation notes
Nov 8 - Fitch Ratings assigns an 'F1' rating to the following State of New Jersey's tax and revenue anticipation notes (TRANs): --$2.6 billion series fiscal 2013C. The notes will be sold via negotiation on Nov. 15, 2012 and will mature on June 27, 2013. Note proceeds will be used for the state's cash flow management purposes and to refinance $2.1 billion in cash flow notes issued privately earlier in this fiscal year. SECURITY The TRANs are not GOs of the state but are payable from available fiscal year (FY) 2013 revenue in the General and Property Tax Relief funds, subject to an appropriation which has already been made. KEY RATING DRIVERS ADEQUATE COVERAGE BY PROJECTED ENDING CASH BALANCE: The state projects adequate financial cushion for repayment of these notes, with projected June 2013 ending general fund and property tax relief fund balances covering note repayment by 1.2 times (x). Inclusive of estimated borrowable funds, note repayment is projected to be covered by 1.4x. REVENUES THROUGH SEPTEMBER WERE NOTABLY BELOW PROJECTIONS: Fiscal year 2013 revenues through September 2012 ran 4% below projections, creating some uncertainty in the attainment of the revenue projections. The revenue discrepancy had recently narrowed slightly; revenue through August 2012 was 4.9% below projections. CASH FLOW IMPACT OF HURRICANE SANDY UNDETERMINED: Changes to the cash flow forecast related to the expected economic and financial impacts of the recent hurricane have not been projected by the state although Fitch anticipates variances in both receipts and disbursements. BROAD EXPENDITURE REDUCTION AUTHORITY: Somewhat offsetting the disappointing revenue collections are the governor's strong executive powers to implement any necessary expenditure reductions to balance the budget and the state's consistent history of implementing expenditure reductions when required to do so. STATE COVENANTS: The state covenants to forecast ending-month cash flows on or before April 13 to ensure compliance with set-aside provisions which require the state to set aside of 75% of principal and interest due two weeks prior to note maturity. LONG-TERM CREDIT QUALITY: The state of New Jersey's GO bonds are rated 'AA-' with a Stable Outlook by Fitch, reflecting strong wealth levels, a diverse economy, limited financial flexibility, a high debt burden, and significant long-term liabilities. CREDIT PROFILE The notes are not general obligations of the state, but will be paid from available fiscal 2013 general and property tax relief fund monies. The rating for the fiscal 2013 notes, at 'F1', is below the level assigned in recent years due to the narrowed financial cushion and current trend of below-projected revenues. The Treasurer's covenant to review revenues over two months prior to note maturity to ensure compliance with set-aside provisions and the governor's extensive power to reduce expenditures and borrow from other funds to supplement cash resources continue to support the high credit quality of the notes. The $2.6 billion in notes now offered total 5% of projected cash flow as compared to 4.2% in fiscal 2012. Funds totaling 75% of the amount due will be set aside two weeks prior to maturity on June 13, 2013; the balance will be set aside on June 26, 2013, one day prior to note repayment. The state is currently projecting an ending cash balance of $618 million on June 30, 2013; down just modestly from the $613 million estimated for fiscal 2012 although that ending balance was more than halved from the projection at the time of note issuance for that fiscal year of $1.4 billion. The projected cash flow safety margin for fiscal 2013, at 1.2%, reflects the narrowing of the state's resources; this level is down from margins in recent fiscal years. Coverage on note repayment based on the state's forecast is a still-adequate 1.2x, down from 1.3x actual coverage in fiscal 2012. The coverage forecast for fiscal 2012 at the time of note sale was 1.6x which was not attained. The state's cash flow forecast is based upon projected growth in receipts of 4.6%, not inclusive of cash flow borrowing; a projection that Fitch believes may prove elusive based on 1.9% year over year growth in receipts through the first quarter of fiscal 2013. In support of the cash flows, borrowable resources have been identified by state officials; identifiable funds of about $445 million are estimated as of Nov. 2, 2012. These resources are down significantly from recent fiscal years, partly reflecting the consolidation of these funds into the state's general fund; $1.4 billion had been identified as recently as fiscal 2010. Assuming about $400 million is available for note repayment widens the cash flow safety margin to 1.8% and projected coverage to a more comfortable 1.4x. The current cash flow projections do not contemplate likely cash flow variances related to Hurricane Sandy, though Fitch believes tax receipts, disbursements, and federal aid will deviate from projections due to the impact of the hurricane, its associated costs, and the anticipated receipt of federal disaster reimbursement. The hurricane resulted in tremendous damage to infrastructure in the state, particularly to its coast line and transit operations. Cost estimates for damages in the state are indeterminable at this time, but significant federal reimbursement through FEMA is expected. The magnitude of expenses that will need to be covered by the state and how the state will fund those costs given its narrow cash balances prior to receiving FEMA reimbursements is uncertain, although Fitch believes that additional cash flow borrowing this fiscal year is a possibility. Offsetting concerns on year-to-date cash receipts that are below expectations and the indeterminate financial and economic impact of the hurricane is the governor's strong executive power to implement any necessary expenditure reductions to balance the budget and the state's consistent history of implementing expenditure reductions when required to do so. For more information on the state of New Jersey's 'AA-' long-term GO rating, please see the Fitch press release titled 'Fitch Rates NJEDA's $399MM School Facilities Construction Bonds and Notes 'A+'; Outlook Stable' dated Sept. 14, 2012 and available at 'www.fitchratings.com'.