UPDATE 2-Fitch cuts New Jersey to 'A+' on large, late revenue gap

Thu May 1, 2014 4:55pm EDT

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(Adds comment from state, lawmaker; market reaction)

May 1 (Reuters) - Fitch Ratings downgraded New Jersey's general obligation debt to 'A+' from 'AA-' on Thursday, citing the projected $807 million revenue shortfall that state officials announced this week with only two months left in fiscal 2014.

The rating outlook is still negative. The action affects about $2.4 billion of GO bonds and about $32 billion of other outstanding securities linked to the state's rating.

New Jersey has now fallen into single-A category with two of the three major Wall Street credit rating agencies. Standard & Poor's Ratings Services cut New Jersey to A+ last month, citing budget tricks, the state's sizable imbalance, "bullish" revenue assumptions and pressure from growing pension obligations.

That was before news of the big revenue shortfall, which Governor Chris Christie's administration said was mostly comprised of lower-than-expected income tax collections as wealthy taxpayers accelerated income into 2012 to sidestep pending federal tax hikes.

The revenue shortfall came on top of a $250 million downward revision made in February when the governor introduced his proposed budget for next year.

"This is not a New Jersey-specific problem, as many other states that are heavily dependent on income taxes, including Connecticut, Pennsylvania, Kansas and Michigan, face shortfalls of similar or even greater magnitude that defied predictive analysis," Treasurer Andrew Sidamon-Eristoff's office said in an emailed statement.

His office cited a report, out this week from The Nelson A. Rockefeller Institute of Government, which noted that volatile 2013 income tax collections made revenue forecasting this year difficult.

For example, Pennsylvania on Thursday also said its April revenue collections were 8.8 percent, or $328 million, below estimates.

With "all options" on the table, Governor Christie will work with the legislature to balance the budget, Sidamon-Eristoff's office said.

Christie has few options to close such a large gap so late in the year. He could use one-time budget measures, but those kinds of gimmicks have already strained the state's credit standing.

One-time budgetary moves in fiscal 2014 could total almost $2.2 billion, or 6.6 percent of the operating budget, if the entire $807 million shortfall is solved with one-time actions, Fitch said.

For example, New Jersey is already getting about $91.6 million of one-shot proceeds from a securitization of a portion of tobacco settlement revenues.

"This is devastating news that reflects poorly on the governor's fiscal management of this state," said New Jersey Assemblyman Gary Schaer, a Democrat, who chairs the assembly's budget committee.

Christie has proposed a $34.4 billion fiscal 2015 budget, but that could shrink with this year's revenues coming up short. Fitch said it expects revisions to next year's revenue assumptions when Sidamon-Eristoff testifies before lawmakers on May 21.

The 2015 budget as proposed forecasts 8.2 percent growth in the personal income tax, 6.1 percent growth in sales tax revenues and 6.7 percent growth in corporate taxes. It also relies on 21 percent growth in casino revenues, mostly from increased online gaming.

Fitch said it considers those forecasts "aggressive."

A spokesman for the treasurer's office did not reply to a question about whether the state would lower its 2015 revenue forecasts.

Secondary trading of New Jersey paper in the $3.7 trillion municipal bond market showed little reaction to the downgrade on Thursday.

"It's more about momentum in the credit than it is about where the actual rating is," said Matt Fabian, a managing director at Municipal Market Advisors.

"There's so much demand for New Jersey paper and so few bonds to buy," he said, noting that the state's many high-income residents would likely hold onto their New Jersey muni bonds in order to reap the tax-exempt advantage in such a high-tax state. (Reporting by Hilary Russ; Editing by Chizu Nomiyama, Grant McCool and James Dalgleish)

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