TEXT - Fitch rates New Jersey Economic Development Auth bonds
Jan 15 - Fitch Ratings assigns an 'A+' rating to $2.2 billion of the following New Jersey Economic Development Authority (NJEDA) school facilities construction refunding bonds and notes: --Approximately $380.5 million 2013 series I (SIFMA Index Notes); --Approximately $1.612 billion 2013 series NN bonds; --Approximately $206.7 million 2013 series OO bonds (Federally Taxable). The 2013 series I 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 Jan. 23, 2013. In addition, Fitch affirms the following ratings: --$9 billion outstanding NJEDA state appropriation-backed obligations at 'A+'; --$2.38 billion outstanding state general obligation (GO) bonds at 'AA-'; --$1 billion garden state preservation trust bonds at 'AA-'; --The 'A+' ratings on other state appropriation-backed debt and 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 annual contributions. WEALTHY ECONOMY WITH SLOW 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, revenues through November continued to demonstrate the current fiscal year's budget imbalance, which is expected to expand absent state action to address both an overly optimistic revenue forecast and the financial impacts of the hurricane. Full funding of annual pension obligations is several years off. Reserve balances are expected to remain narrow, offering limited flexibility to absorb unforeseen needs. STRONG EXECUTIVE POWERS: The governor has strong powers to implement any necessary expenditure reductions to balance the budget and the state has a record of doing so. WHAT COULD TRIGGER A RATING ACTION The 'AA-' GO rating and Stable Outlook assume that the state will act to maintain budget balance in the current and coming fiscal years despite revenue underperformance year-to-date and the effects of Hurricane Sandy. Fitch also assumes that pension funding will continue to increase in line with the established schedule. Any change in these assumptions could result in negative rating pressure for the GO and related credits. 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 $9 billion, exclusive of refunding bonds, has been issued to date. Proceeds from the current sale will refinance outstanding school facilities construction bonds while reducing the program's exposure to variable rate and derivative risks, and replace the remaining share of the program's variable-rate debt with floating rate notes. The 2013 series I SIFMA index issue will 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 long-term spending pressures, including continuing capital needs and 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 annual 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. Adding to the state's credit pressures is the overly optimistic revenue forecast adopted with the fiscal 2013 budget, which began on July 1, 2012. The state projected robust revenue growth in fiscal 2013 of $2.6 billion (9.1% above 2012 levels not inclusive of fund adjustments) reflecting projected personal income tax (PIT) growth of 5.7%, sales tax growth of 4%, and an expected 26% increase in corporate tax receipts. Actual receipts through November 2012 show receipts for the first five months of the fiscal year running 5.6% below budget ($451 million). The underperformance is likely partly due to Hurricane Sandy, which made landfall on October 29, 2012 although receipts through October ran 4.1% below budget. Significant unknowns include the impact on state PIT revenues of federal tax rate changes related to the 'fiscal cliff,' as well as the extent and timing of FEMA disaster relief. Fitch assumes the state will ultimately receive FEMA aid at a level similar to hurricane relief offered during past disaster responses. The governor's budget proposal for fiscal 2014, to be released next month, is expected to include updated revenue estimates for fiscal 2013 and provide more clarity on the state's current fiscal position and plans. Budgeted appropriations for fiscal 2013 are approximately 4.5% above estimated fiscal 2012 spending. Local education spending grows by $1.2 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. At budget adoption, the state expected to close fiscal 2013 with an ending balance of $648 million, about 2% of budgeted expenditures, an estimate that has already been reduced from the downward adjustment to the ending fund balance in fiscal 2012, to $447 million from an earlier-estimated $570 million. Fiscal 2012 had revenue growth of $426 million (1.5%) above fiscal 2011 levels and an ending fund balance of $447 million that was a $426 million decrease from the opening year balance of $873 million and lower than the $640 million that was anticipated early in the fiscal year. 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 November 2012 was 0.5% above prior year levels, below the 1.4% national growth for the same period. State unemployment of 9.6% for November 2012 is above the national level of 7.7% for the same month and largely reflects an increase in the labor force rather than a loss of employment; the rate is up from 9.2% from one year earlier. New Jersey's wealth levels are high, with 2011 per capita personal income of $52,430 equaling 126% of the national level, ranking third among the states. 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 7.9% of 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 has limited growth in debt levels. As of July 1, 2011, pension liabilities for the public employee retirement system (PERS), reflective of pension reforms and a change in plan assumptions, were 67.3% funded on an aggregate basis and the teachers System was 62.8% funded. System-wide funding levels for the PERS and teacher systems - using Fitch's more conservative 7% discount rate assumption - are weak at 61% and 56.9%, 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 actuarially required pension contributions over a seven-year period will continue to weigh on funded ratios 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 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, bonds issued under the New Jersey Municipal Qualified Bond Act, and bonds issued under the New Jersey School Bond Credit Enhancement Program.
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