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MOODY'S ASSIGNS A2 RATING TO THE NEW JERSEY SPORTS AND EXPOSITION AUTHORITY'S $88.6 MILLION STATE CONTRACT REFUNDING BONDS, 2011 SERIES A AND B (TAXABLE)

16 Aug 2011

RATING OUTLOOK IS STABLE

New Jersey (State of)
State
NJ

Moody's Rating

ISSUE

RATING

State Contract Refunding Bonds, 2011 Series A

A2

  Sale Amount

$45,100,000

  Expected Sale Date

08/16/11

  Rating Description

Lease Rental

 

State Contract Refunding Bonds, 2011 Series B

A2

  Sale Amount

$43,500,000

  Expected Sale Date

08/16/11

  Rating Description

Lease Rental

 

Opinion

NEW YORK, Aug 16, 2011 -- Moody's Investors Service has assigned an A2 rating to the New Jersey Sports and Exposition Authority's ("NJSEA") $88.6 million State Contract Refunding Bonds, 2011 Series A and 2011 Series B (Taxable). The outlook is stable. The bonds are expected to sell on August 17 and proceeds will refund outstanding bonds for net present value savings and restructure debt service for budgetary relief in fiscal 2012.

SUMMARY RATINGS RATIONALE

The bonds are special obligations of the authority payable solely from anticipated state contract payments to be made by the State of New Jersey from its general fund. The A2 rating is notched off the state's general obligation bond rating of Aa3, reflecting the need for annual legislative appropriation of the contract payments. There are no bondholder remedies in the event of a non-appropriation, and due to the risk of non-appropriation for these less essential projects being financed, we rate these bonds two notches below the state's general obligation rating. Almost 90% of the debt service on net tax-supported debt in New Jersey is subject to appropriation. The importance of maintaining access to the capital markets provides strong incentive for the state to make these appropriations.

The Aa3 general obligation rating reflects the state's relatively weak financial position and the expectation that recovery will be unlikely in the medium-term due to rapidly rising fixed costs, relatively slow economic recovery, and a lack of specified plan to rebuild fund balances. In addition, pension and other post-employment benefit (OPEB) liabilities will continue to grow rapidly, further pressuring the already high-debt state. Revenue growth will be moderate as employment continued to decline through June 2011 and economic recovery is projected to lag the nation. There is no specific plan to rebuild liquidity and fund balance. The Aa3 rating also incorporates the state's broad, diverse economy and high resident wealth levels, as well as the governor's broad powers to reduce expenditures, which were implemented most recently in the 2011 budget.

The outlook is stable reflecting recent revenue growth that signals some economic stabilization; a decreased reliance on one-time resources to balance the FY2012 budget; and the state's proactive measures to curb long-term liability growth, including pension and OPEB reforms and a increase in TTFA pay-go capital funding to reduce long-term borrowing needs.

Credit strengths:

-- High resident wealth levels and diversified economy

-- Recent revenue growth, although modest, suggests improved economic stability

-- Administration is taking a proactive approach to managing future liabilities and cost growth

-- Broad executive powers to reduce expenditures

-- The state's high reliance on access to appropriation-backed debt, and the established history of appropriating for these bonds which significantly reduces appropriation risk

Credit challenges:

-- Narrowed reserves and weakened liquidity with no specified plans to rebuild balances

-- Positive GAAP fund balances that have been overstated by incorporating savings from underfunding pensions and historic use of bond proceeds to fund operations, although no bond proceeds have been used for operations since 2005

-- Budgetary pressure driven by rapidly growing pension and OPEB costs and already-high debt service costs

-- Revenue growth that is unlikely to keep pace with expenditures as economic recovery lags the nation

-- 4th highest debt per capita and above-average pension and retiree health benefit liabilities

-- Structural imbalance that remains although reliance on one-time resources has declined

-- Absence of certain best practices for governance

BONDS SECURED BY STATE CONTRACT PAYMENTS

The bonds are secured by anticipated state contract payments from the state's general fund, on a parity basis with existing and future bonds issued under the authority's 1992 State Contract Bond Resolution. There are approximately $549 million of bonds outstanding under this resolution. The authority's bonds have been issued to finance a variety of sports and entertainment facilities across the state. There is no debt service reserve fund.

NON-APPROPRIATION RISK JUSTIFIES TWO-LEVEL DISTINCTION FROM STATE G.O. RATING

The authority's bonds are rated two notches below the state's Aa3 general obligation rating because of the need for annual legislative appropriation of state contract payments, and because of the non-essential nature of the financed facilities. In the event of a failure by the legislature to appropriate sufficient funds for debt service, there are no substantive remedies available to bondholders. No security interest is provided in any assets of the authority. The obligation to pay debt service once the legislature has appropriated funds is unconditional. Moody's sees a strong likelihood of timely legislative action because of the state's reliance on market access for subject-to-appropriation debt, which accounts for about 90% of its outstanding bonds.

Much of New Jersey's subject-to-appropriation debt, because it was issued to finance projects more essential to governmental programs, is rated a notch higher than Sports and Exposition Authority-issued bonds. The 1992 Series C bonds to be refunded were issued to finance a portion of the costs of the Atlantic City Convention Center. While the convention center provides economic and tax revenue benefits, bonds issued for this facility could be more vulnerable to non-appropriation than those issued for essential public facilities such as schools.

RECENT DEVELOPMENTS

SLIGHT REVENUE GROWTH IN FISCAL 2011; 2012 BUDGET INCORPORATES SPENDING REDUCTIONS, ONE-TIME RESOURCES AND UNCERTAIN SOLUTIONS

Fiscal 2011 available fund balance (budgetary basis) ended at $696 million, compared to the $303 million originally budgeted, due to relatively flat appropriations and unanticipated revenue growth in the second half of the fiscal year. Revenues exceeded the budget by $342 million (1.2%) and total appropriations (net of lapsed appropriations) were 0.3% higher than budgeted.

The adopted fiscal 2012 budget decreased 1.8% from fiscal 2011, however the state expects that $1.04 billion of supplemental appropriations may be necessary if Transitional Aid to cities is reinstated, as has been, and certain savings are not realized. With these additional appropriations, the fiscal 2012 budget would be 1.6% higher than the fiscal 2011 level, and the FY2012 ending surplus could be well below the budgeted $640 million. Savings in the current fiscal 2012 budget are based on pension reform and healthcare reform and plan redesign; a decrease in Transitional Aid to cities; and a pre-payment of FY2012 school construction aid that was made in FY2011. The budget also absorbs the loss of $879 million of ARRA funding, includes the statutory 1/7 pension contribution ($484 million), and adds the court-mandated increase in school funding ($450 million) while continuing to reduce the state's reliance on one-time resources, which is down to 2% of budget from 13% in FY2010. However, $739 million of savings related healthcare reform and redesign remains uncertain, increasing budgetary pressure and potentially challenging the state to remain structurally balanced during the year. The 2012 budget also assumes 4% growth in tax revenues, compared to the 2.2% growth realized in fiscal 2011, which would be difficult to achieve if economic growth does not continue.

PENSION REFORM PROVIDES LONG-TERM BENEFITS BUT LITTLE BUDGETARY RELIEF

To manage growing pension and OPEB liabilities and the associated budgetary pressure, the state adopted program reforms to reduce benefits and increases employee contributions. The final reforms are less aggressive than the version proposed by Gov. Christie, but will still provide the state with significant savings - both in total liability and annual budgetary savings. Savings from pension reform, however, will not have any material positive impact for at least the next seven years due to the budgetary impact of increasing annual pension contributions from 0% to 100% over that time period. The reform improves the fiscal 2010 state pension funded ratio to a still-low 65% from 56%. The benefits of the reform are more visible in the long-term horizon; by 2041, the funded ratio is projected to be 84%, compared to 50% without the reforms, and annual required contribution is projected to be $6 billion rather than $13 billion. The legislation establishes a committee for each pension plan that will have the authority to revise the plans, therefore, the 2011 reforms may not provide a permanent benefit to the pension systems, as many of the benefits being reduced now could be reversed once an 80% funding target has been met.

The health care portion of the reform package will provide more immediate savings, but at a lower level than was projected with the proposed reforms. The governor's proposed FY2012 budget assumed health care reform savings would reach $320 million, however the fiscal note published by the legislature in connection with this reform estimates FY2012 savings at $10 million. In addition, the increased employee contributions - a key savings driver - will sunset in four years and can be reconsidered by new committees established to manage the state's two health programs. The reform's impact on OPEB liabilities is still being estimated. Two lawsuits have been filed against these reforms questioning their constitutionality. The cases are ongoing, but a finding against the state could overturn these reforms.

For more information on the state's pension and health care reform, please see Moody's Special Comment, "New Jersey's Pension Reform Provides Long-Term Relief even as Fiscal Pressures Remain," published on June 29, 2011.

REGULAR CASH FLOW BORROWING EXPECTED THIS FALL

Annual cash flow borrowings have increased steadily, reaching $2.25 billion in FY2011. The state recently entered into a Note Purchase Contract with J.P. Morgan for $2.25 billion to meet cash flow needs. The state has not yet drawn on this contract and plans to fully repay it with its regular public note offering this Fall. Favorably, operating liquidity is bolstered by approximately $800 million of cash available for interfund borrowing (as of August 12, 2011) despite a 2010 constitutional amendment limiting the state's ability to borrow from certain funds for cash flow relief.

US DOT REQUESTS REIMBURSEMENT FOR ARC TUNNEL

The US Federal Transit Administration (FTA) has requested reimbursement of $271 million of funds that were used for the ARC Tunnel project planning and engineering studies. The FTA could elect to withhold distribution of grants and other federal funds until the full amount has been repaid. In an April 2011 letter to the state, the Secretary of Transportation stated that he would not withhold federal funds at this time. The state is currently in negotiations with the FTA and it is unclear whether the state would pay a reimbursement from the general fund, NJ Transit, or another fund; the size and timing of the reimbursement; and whether the DOT will continue to refrain from withholding federal funds. While a $271 million reimbursement is relatively minor compared to the state's general fund, it is more notable compared to NJ Transit's liquidity position. As of June 30, 2010, NJ Transit had $66.5 million of unrestricted cash and $382 million of restricted cash and investments (bond and grant proceeds).

For additional information on the state, refer to Moody's New Issue Report for New Jersey and New Jersey Transportation Trust Fund Authority dated April 27, 2011.

Outlook

New Jersey's credit outlook is stable, reflecting our expectation that recent revenue growth signals some economic stabilization; a decreased reliance on one-time resources to balance the FY2012 budget; and the state's proactive measures to curb long-term liability growth, including pension and OPEB reforms and a proposed increase in TTFA pay-go capital funding to reduce long-term borrowing needs.

What could change the state's rating -- UP?

-- Higher than projected, sustained revenue growth that materially eases the budgetary pressure of growing fixed costs

-- Sustained progress in structurally balancing the state's budget, including full funding of all non-discretionary obligations, together with restoration and maintenance of financial reserves and liquidity

-- Reduction in the state's debt burden, while addressing pension and retiree health benefit funding

-- Adoption and implementation of policies and practices generally embraced by higher level credits such as multi-year financial planning and debt affordability policy

What could change the state's rating -- DOWN?

-- Slower-than-projected revenue growth that increases budgetary pressure of growing fixed costs

-- Failure to restore operating reserves or GAAP fund balances and liquidity position

-- Significant increase in the state's debt position

-- Growing dependence on nonrecurring budget solutions, particularly in light of uncertain solutions in FY2012 budget and rapidly growing pension and OPEB costs

-- Economic recovery that materially lags the nation

The principal methodology used in this rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in October 2004. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Baye B. Larsen
Analyst
Public Finance Group
Moody's Investors Service

Edward Hampton
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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MOODY'S ASSIGNS A2 RATING TO THE NEW JERSEY SPORTS AND EXPOSITION AUTHORITY'S $88.6 MILLION STATE CONTRACT REFUNDING BONDS, 2011 SERIES A AND B (TAXABLE)
No Related Data.
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