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.
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%
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
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
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
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
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'.