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MOODY'S ASSIGNS MIG 1 RATING TO HUDSON COUNTY IMPROVEMENT AUTHORITY'S (NJ) $100.4 COUNTY-GUARANTEED POOLED BOND ANTICPATION NOTES, SERIES I

25 Jul 2011

$364 MILLION OF THE COUNTY'S LONG-TERM G.O. COUNTY AND COUNTY-GUARANTEED DEBT IS RATED Aa3

County
NJ

Moody's Rating

ISSUE

RATING

County-Guarateed Pooled Notes, Series 2011 I-1

MIG 1

  Sale Amount

$100,400,000

  Expected Sale Date

07/28/11

  Rating Description

Bond Anticipation Note

 

Opinion

NEW YORK, Jul 25, 2011 -- Moody's Investors Service has assigned MIG 1 ratings to the Hudson County Improvement Authority's (NJ) $100.4 million County-Guaranteed Pooled Notes, Series 2011 I. Proceeds of notes will refund loans to the City of Bayonne (G.O. rated Baa1/negative outlook, $21.6 million) ,Bayonne Municipal Utilities Authority ($2.6 million), Town of Harrison (G.O. rated Ba3/negative outlook, $1.7 million), Jersey City (G.O. rated A2/negative outlook; $7.5 million), Township of Weehawken (G.O. rated Ba1; $25.2 million), Town of West New York ($4 million).

RATINGS RATIONALE

While the notes are expected to be repaid from borrower loan repayments, the ultimate security for this issue is derived from Hudson County's absolute and unconditional obligation to cure any deficiency in the Debt Service Fund prior to note maturity, and the authorization to issue county general obligation bonds for this purpose pursuant to a Guaranty Ordinance. Therefore, the MIG 1 rating factors in the county's long-term credit quality, satisfactory history of market access, and sound mechanics under the county guaranty to allow timely repayment of the current notes at their August 17, 2012 maturity.

The county's long-term general obligation rating of Aa3 reflects the county's substantial, expanding tax base and our expectation that the county will maintain a stable financial position supported by conservative management of economically sensitive revenues and limited reliance on one-time revenue sources. We believe the county is relatively well positioned to maintain financial stability in the coming years despite revenue constraints created by the imposition of a more stringent statewide 2% property tax levy limitation, given continued growth of the county's taxable base as PILOTs expire and properties become taxable.

The negative outlook reflects the county's exposure, through guaranteed debt, to the Town of Harrison's (GO rated Ba3/negative outlook) underperforming development projects as well as to Hudson County Improvement Authority's relatively stressed solid waste system. Future rating reviews will consider the county's ability to maintain its current financial position in light of a heightened risk to fund guaranteed debt service, given the Town of Harrison's recent challenges in meeting debt obligations. In addition, the negative outlook considers the county's exposure to short-term market volatility, as county and county-guaranteed short-term notes and bonds, amounting to $307.7 million, represent approximately one-third of total outstanding debt and take the form of maturities ranging from $27 million to $163 million.

STRENGTHS

-Substantial and diverse tax base with favorable location

-Stable, structurally balanced financial operations

CHALLENGES

-Significant exposure to county-guaranteed enterprise debt and short-term debt

-Below average wealth levels

-Above-average debt burden

DETAILED CREDIT DISCUSSION

HUDSON COUNTY IMPROVEMENT AUTHORITY CONDUIT ISSUER

Hudson County Improvement Authority (HCIA) is a conduit issuer and has no independent taxing authority. The current notes are expected to be repaid from borrower loan payments, which are general obligations in the case of the municipalities. The MIG 1 rating is based on the ultimate security provided by Hudson County's obligation to fund any insufficiency in the Debt Service Fund prior to note maturity. Borrower loan payments are due to the trustee 10 days before the current note matures. In the event of non-payment by any participant, the trustee must notify the participant, the county and the HCIA within one business day. The county is required to cure any deficiency in the Debt Service Fund no later than two days prior to note maturity. Importantly, the guaranty requires that borrowers either execute a purchase contract for renewing outstanding notes 30 days prior to note maturity with a delivery date no later than 10 days prior to note maturity (loan payment date), and/or provide notice to the county that rather than renewing outstanding notes it will pay principal and interest on outstanding debt no later than 10 days prior to maturity. Also, the county's Guaranty Ordinance, adopted August 13, 2009, authorizes the issuance of county general obligation debt for this purpose. Moody's believes this structure gives the county sufficient time to appropriate for debt service, if necessary, prior to note maturity on August 17, 2012. The county has demonstrated its ability to access the capital markets, having received two bids on its most recent taxable competitive sale (sold unrated in September 2008) and four bids on its most recent tax-exempt competitive sale (August 2006) as well as successfully negotiating eight pooled notes prior to this sale.

SUBSTANTIAL AND DIVERSE TAX BASE WITH BELOW AVERAGE WEALTH LEVELS

Moody's expects continued growth in the county's substantial $66.6 billion tax base given ongoing development, albeit at moderate levels as the county has been impacted by the slowing residential housing market. The county benefits from its location directly across the Hudson River from New York City (rated Aa2/stable outlook) as well as the significant development and available employment within the county. The county has an excellent transportation network, including highways, railroad, commuter rail, ferry and underground train service to New York City, all of which support the flow of residents to and from New York. After September 11, 2001, many New York City-based companies, including Goldman Sachs (senior unsecured debt rated A1/negative outlook), UBS (long term debt rated Aa3/negative outlook) and Credit Suisse First Boston moved all or a portion of their operations to the county. Reflective of Hudson County's strategic location within a robust metropolitan area as well as its own diverse economy, the county's largest employers include several major corporations and institutions such and United Parcel Services (Aa3/stable outlook), Bank of Tokyo Mitsubishi Trust , Hoboken University Medical Center and Jersey City Medical Center. Of note is the economic activity along the waterfront in Jersey City, although these properties have been granted multi-year PILOT contracts and therefore are not included in the county's current equalized valuation. These waterfront developments have attracted numerous new employers to the county, including The Depository Trust & Cleaning Corporation (DTCC), which will bring with it a staff of about 1,600 in 2012. Other municipalities in the county, including Bayonne (G.O. rated Baa1/negative outlook), Hoboken (Guaranteed Hospital Revenue Bonds rated Baa1), West New York (no rating) and Harrison, have begun to implement redevelopment plans, which are expected to spur additional growth in the medium term.

Growth in equalized values, which had averaged strong 16.9% annual gains between 2003 and 2008, slowed considerably to a modest 2.8% in 2009 and declined in 2010 by 2.9%, reflecting the economic recession and housing market downturn. Growth is expected to remain modest over the near term as development continues to be dampened by slow economic recovery, although officials report some recent stabilization of housing prices. The county is experiencing increased tax appeal claims, although the impact on tax base valuation is not yet determined. In 2011 Added and Omitted tax revenues, which reflect properties added during the course of the year, retuned to 2008 levels of $4.8 million with growth of $4.6 million after more moderate years in 2009 and 2010 ( $1.7 million and $2.8 million, respectively), evidencing a combination of new development and properties coming off PILOTs in Jersey City. A solid equalized value per capita of $111,429 only partially reflects the quality of development as much of the new real estate is not yet on the tax rolls. Socio-economic indicators fall 20% to 30% below state levels and the poverty rate of 15.5% as of the 2000 Census is the second highest in the state. The February 2011 unemployment rate of 10.8% is above state and national medians (9.9% and 9.5%, respectively) and a marked decrease from a year ago when unemployment equaled 11.2%.

STABLE, ALBEIT NARROW, RESERVE LEVELS

Moody's expects the county to maintain its Current Fund balance at approximately the current level given a four-year track record of maintaining reserves between 5% and 6% and the county's stated commitment to maintaining structural balance, as reflected in annual moderate property tax increases and conservative budgeting of economically sensitive revenue sources. The county ended fiscal 2008 with a Current Fund balance of $24.3 million (5.27% of revenues) after fully replenishing $22 million of fund balance appropriated as a revenue source in the budget and adding $1.8 million to reserves. Notably, revenues from the Register of Deeds exceeded budgeted levels by more than $500,000, reflecting a conservative approach to budgeting of this economically sensitive revenue stream (budgeted at $9.4 million as compared with $13 million in actual receipts in 2007). This differentiates the county from its peers, many of whom saw shortfalls in this area in 2008. Sources of fund balance replenishment included surplus budgeted revenues ($2.4 million), particularly related to housing federal inmates and the county's jail facility, the receipt of non-budgeted revenues ($6.7 million), and the cancellation of current year appropriations, prior year appropriation reserves, and contracts and commitments ($3.2 million, $4 million and $4.5 million, respectively). The county received 53.3% of Current Fund revenues from property taxes, which local municipalities are responsible for remitting to the county in full, thereby ensuring a high level of predictability for its major revenue source.

Fiscal 2009 operations resulted in a modest increase in the Current Fund balance of $243,000 after replenishing $23.8 million of surplus utilized as revenue. Consequently, reserves grew to a solid $24.5 million, or 5.21% of revenues. Sources of replenishment included over-performance of anticipated revenues (by approximately $1.5 million) driven by strong results at the county's hospital, the receipt of unanticipated revenue from housing state and federal inmates at the county's jail facility ($4.5 million), the cancellation of current year expenditures ($6.7 million), largely resulting from vacant positions (approximately 350 positions) as part of management's plan to control expenditures in light of declining economically sensitive revenues, and the cancellation of prior year appropriation reserves in line with recent trends. Register of Deeds revenues were budgeted to decline to $6.8 million (compared with actual collection of $10.06 million in 2008), in keeping with recent past practice. These economically sensitive revenues came in close to budget for the year. Fiscal 2009 operations reflect the deferral of a portion of the county's pension contribution ($6.8 million) as allowed by state law in 2009.

Unaudited fiscal 2010 operations indicate full replenishment of $24 million from fund balance utilized as a revenue in the Current Fund, with a modest addition to fund balance of approximately $300,000. Current Fund balance as a percentage of revenues is expected to remain flat at 5.2%. Despite significant increases in pensions costs of approximately $7 million (resulting from the deferral in 2009) and health benefit costs of approximately $5 million, total appropriations for 2010 declined by 1.3% (budget to budget), reflecting work force reductions through attrition and hiring freezes. Given unaudited figures, appropriated fund balance is expected to be replenished with the payment received from a prior refunding ($1.03 million) and nonbudgeted revenues from additional prisoner inmates ($1.4 million) in conjunction with traditional sources of replenishment, such as cancelled and lapsed appropriations. The working fiscal 2011 budget indicates a similar fund balance appropriation as the previous year of $24.5 million, a high 96% of total Current Fund balance. Despite the large appropriation, we anticipate financial operations will have similar results as previous years and the county will replenish most of that amount, particularly given the increase in added and omitted taxes receivables for 2011.

DEBT BURDEN EXPECTED TO REMAIN MANAGEABLE; SIGNIFICANT AMOUNT OF COUNTY-GUARANTEED DEBT

Moody's expects that the county's above-average net direct debt burden (1.4%) will remain manageable given limited future borrowing plans, ongoing tax base expansion and below average amortization of debt (69.2% repaid within 10 years). Debt service on bonds is a high 9.6% of fiscal 2010 expenditures (unaudited), reflecting the fact that the county has financed a significant portion of its infrastructure through lease purchase agreements (approximately $295 million outstanding as of April 2011).

We also note the county's large amount of guaranteed short and long term debt (50% of total outstanding debt), particularly $39.4 million of county-guaranteed Harrison Stadium Land Acquisition Special Obligation Capital Appreciation Bonds, Series 2006 A-1 and A-2 (GO rated Aa3/negative outlook). Although the county has not been called upon to pay debt service for these bonds to date, the development site is not generating sufficient PILOT payments to cover debt service as intended, and Harrison (G.O. rated Ba3/negative outlook) has paid 2010 debt service with short term notes issued through the Hudson County Improvement Authority. The town expects to do the same for its 2011 principal and interest payment. Looking ahead, we believe there is a heightened risk that the county may be called upon to make payment, given Harrison's challenges in meeting debt service obligations. The county also guarantees $270 million of BANs through the HCIA, which are repaid by participating municipalities through loan pools. We view the large amount guaranteed debt, 50% of the county's total outstanding debt, in combination with its already above-average debt burden as a potential risk to financial stability should the guarantees be called.

Outlook

The negative outlook reflects the county's exposure, through guaranteed debt, to the Town of Harrison's (GO rated Ba3/negative outlook) underperforming development projects as well as to Hudson County Improvement Authority's relatively stressed solid waste system. Future rating reviews will consider the county's ability to maintain its current financial position in light of a heightened risk to fund guaranteed debt service, given the Town of Harrison's recent challenges in meeting debt obligations. (Please see our report on the Town of Harrison dated May 20, 2011 for more.) In addition, the negative outlook considers the county's exposure to short-term market volatility, as county and county-guaranteed short-term notes and bonds, amounting to $307.7 million, represent approximately one-third of total outstanding debt and take the form of maturities ranging from $27 million to $163 million.

WHAT COULD CHANGE THE RATING (UP - REMOVAL OF THE NEGATIVE OUTLOOK):

- Growth in taxable assessed valuation over the medium term

-Increased Current Fund balance

- Increased liquidity

-Decline in amount of county-guaranteed debt

WHAT COULD CHANGE THE RATING (DOWN):

-Failure to pay county-guaranteed debt service payments should the need arise

-Decline in financial position as a result of fulfilling county-guaranteed debt service obligations.

- Material multi-year declines in fund balances and liquidity

- Significant growth in the HCIA's debt burden through direct borrowing or county-guaranteed debt

KEY STATISTICS

2000 Population: 601,146

2007 Population (est.): 598,160

2010 Equalized Value (estimated): $66.6 billion

2010 Equalized Value Per Capita: $111,524

1999 Per Capita Income (as % of State and US): $21,154 (78% and 98%)

1999 Median Family Income (as % of State and US): $44,053 (67% and 88%)

Direct Debt Burden: 1%

Amortization of Principal (10 years): 69.2%

Fiscal 2009 Current Fund balance : $24.5 million (5.2% of Current Fund revenues)

Fiscal 2010 Current Fund balance (unaudited): $25.1 million (5.2% of Current Fund revenues)

Long term G.O. debt outstanding: $622 million (approximately $364 million rated by Moody's)

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. 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, parties not involved in the ratings and public 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 credit 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 ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service 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 the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Josellyn Yousef
Analyst
Public Finance Group
Moody's Investors Service

Andy Moleon
Backup Analyst
Public Finance Group
Moody's Investors Service

Julie Beglin
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service, Inc.
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USA

MOODY'S ASSIGNS MIG 1 RATING TO HUDSON COUNTY IMPROVEMENT AUTHORITY'S (NJ) $100.4 COUNTY-GUARANTEED POOLED BOND ANTICPATION NOTES, SERIES I
No Related Data.
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