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Rating Update:

MOODY'S DOWNGRADES TO Aa1 FROM Aaa THE G.O. RATING FOR THE TOWNSHIP OF BERKELEY HEIGHTS (NJ); REMOVES STABLE OUTLOOK

24 Nov 2010

Aa1 RATING APPLIES TO $10 MILLION OF RATED OUTSTANDING DEBT

Municipality
NJ

Opinion

NEW YORK, Nov 24, 2010 -- Moody's Investors Service has downgraded to Aa1 from Aaa the Township of Berkeley Heights' (NJ) long-term rating on approximately $10 million in outstanding rated debt secured by the township's general obligation unlimited tax pledge. Concurrently, Moody's has removed the stable outlook on the township.

RATINGS RATIONALE

The downgrade to a Aa1 rating reflects the township's narrowed financial position following a large decline in Current Fund balance in 2009 after several years of modest declines, and the expectation that the township's reserves will remain at these currently narrow levels over the medium term. The Aa1 rating also incorporates the township's moderately-sized and wealthy tax base with ongoing tax appeals from its two largest taxpayers.

NARROWED FINANCIAL POSITION EXPECTED TO REMAIN STABLE

Moody's believes that Berkeley Heights' financial position has stabilized in fiscal 2010 (ending December 31) following Current Fund declines in four of the last five years including a large $1 million decline in fiscal 2009 that reduced Current Fund balance to a narrow 6.5% of Current Fund revenues from a satisfactory 13% in fiscal 2008. In fiscal 2009, the township utilized $1.9 million of Fund Balance as anticipated revenue and ended with a $1 million drawdown driven by fee and permit revenue that was $498,000 under budget and lower unexpended balance of appropriation reserves and delinquent tax collections, which have historically served as a primary source of replenishing appropriated Fund Balance.

In fiscal 2010, the township appropriated $845,000 of Fund Balance and management expects to nearly replenish the entire amount with unexpended balance of appropriation reserves and higher than budgeted miscellaneous revenues including interest and costs on taxes ($23,000), cable franchise fees ($41,000) and construction fees ($20,000 over budget as of 10/31). In fiscal 2010, a $472,000 mid-year reduction in state aid was offset by a reduction of part-time employees ($15,000), employee furloughs ($58,000) and a 9% cut to all departmental spending ($578,270).

AFFLUENT NORTHERN NEW JERSEY SUBURB WITH CONCENTRATION OF TOP TAXPAYERS

The township's moderately-sized $3.5 billion tax base, located in Union County (G.O. rated Aaa/stable outlook), should exhibit long-term stability given its proximity to employment centers in northern New Jersey and New York City (G.O. rated Aa2/stable outlook) but remains vulnerable to tax appeals due to the relatively high degree of taxpayer concentration. The ten largest taxpayers in this community comprise nearly 21% of assessed value with the largest, Lucent Technologies (senior unsecured debt rated B1/negative outlook), comprising 8.8% of the township's taxable property. Lucent's annual tax appeals since 2005 are currently in litigation. While management reports that any settlement will likely involve adjusting future assessments rather than repayment of past collections, a successful appeal could reduce Lucent's assessed value, which was $165 million in 2009, by up to 45%. Additional tax appeal exposure exists in the township's second largest taxpayer, the Connell Company and related owned properties, which together claim 6.4% of assessments. Management indicates that four of Connell's properties were awarded a 30% reduction to their assessed value in 2010 and that a fifth property is currently under appeal. Future rating actions will be driven, in part, by the outcome of these pending tax appeals and their impact on the township's taxable property base.

The township's tax base is wealthy and primarily residential, comprising over 70% of assessed value. Housing appreciation combined with new commercial construction, namely two Connell buildings, contributed to the moderate 4.8% average annual full value growth from 2005 to 2009, though recent data indicates a marked slowing in this trend. Per capita and median family income represent a strong 204% and 238% of national medians, respectively, and the high $263,745 full value per capita, although somewhat bolstered by a concentration of commercial properties, also encompasses the high value of the housing stock reflected in a median housing value of 272% of the U.S. median as reported by the 2000 census. Unemployment is 9.6% as of August 2010 and is comparable to state and national rates.

DEBT POSITION TO REMAIN MANAGEABLE

As an infrequent borrower, Berkeley Heights' low 0.5% direct debt burden should remain manageable given a lack of imminent borrowing plans and an average payout with 63.7% of obligations retired in 10 years. Debt service currently comprises a modest 4.4% of Current Fund expenditures. The township's overall debt burden rises to an above average 2.4% of full value when overlapping obligations of the school district and the township's pro-rata share of county obligations are included. All outstanding debt is fixed rate and the township has no exposure to derivative products.

WHAT COULD DRIVE THE RATING UP:

*Significant augmentation of reserves in line with similarly rated municipalities

*Further tax base diversification

*Settlement of pending tax appeals favorable to the township

*Implementation of conservative formal fiscal policies

WHAT COULD DRIVE THE RATING DOWN:

*Continued erosion of financial reserves

*Unfavorable resolution of pending tax appeals

*Notable increases in debt levels

*Material decline in socioeconomic characteristics of township

KEY STATISTICS:

2000 population: 13,407

2010 equalized valuation: $3.5 billion

2010 equalized value per capita: $263,745

1999 Per Capita Income (as % of NJ and US): $43,981 (162.9% and 203.7%)

1999 Median Family Income (as % of NJ and US): $118,862 (181.8% and 237.5%)

Unemployment rate (August 2010): 9.6% (State of New Jersey: 9.4%)

Direct Debt Burden: 0.5%

Overall Debt Burden: 2.4%

Payout of Principal (10 years): 63.7%

Fiscal 2009 Current Fund balance: $956,000 (6.5% of Current Fund revenues)

Total long-term rated debt outstanding: $10 million

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining a credit 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

Walter Pitts
Analyst
Public Finance Group
Moody's Investors Service

Josellyn Yousef
Backup Analyst
Public Finance Group
Moody's Investors Service

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

Contacts

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MOODY'S DOWNGRADES TO Aa1 FROM Aaa THE G.O. RATING FOR THE TOWNSHIP OF BERKELEY HEIGHTS (NJ); REMOVES STABLE OUTLOOK
No Related Data.
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