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Rating Update:

MOODY'S DOWNGRADES TO Ba3 FROM Baa1 THE G. O. RATING FOR THE TOWN OF HARRISON (NJ); AFFIRMS NEGATIVE OUTLOOK

20 May 2011

DOWNGRADE TO Ba3 APPLIES TO $17.5 MILLION OF RATED OUTSTANDING G.O. DEBT

Municipality
NJ

Opinion

NEW YORK, May 20, 2011 -- Moody's Investors Service has downgraded to Ba3 from Baa1 the Town of Harrison's (NJ) long-term general obligation rating on approximately $17.5 million in rated outstanding debt secured by the town's general obligation, unlimited tax pledge The Ba3 does not apply to outstanding county-guaranteed debt which carries Hudson County's general obligation rating of Aa3 and its negative outlook. Harrison's general obligation outlook is negative.

RATINGS RATIONALE

The downgrade to Ba3 reflects our belief that Harrison may be challenged to pay debt service on its general obligation debt in the next several years given its outsized enterprise-related risk and substantial leverage. The town recently added a significant amount of debt to foster redevelopment efforts as well as higher than expected cash flow notes issued in March 2011. Large increases in leverage in 2010 and 2011 debt service have not been matched by commensurate increases in development related-revenues, as the city had anticipated. The downgrade also incorporates the town's rapidly eroded financial position (reserves fell to 0.7% of revenues in fiscal 2010 (unaudited) from 10.5% in fiscal 2009), sharply increased dependence on cash flow borrowing for operations in fiscal 2011 and recently demonstrated poor access to the capital markets. The rating also incorporates the town's relatively limited tax base and weak demographics, which potentially limits capacity to increase property tax revenues in order to meet the higher debt service obligations. It also considers the additional security provided by Hudson County's (G.O. rating Aa3/negative outlook) general obligation guaranty on 34% of outstanding Harrison debt, and corporate guarantees for debt service payment by developers on 12% of debt ($14.4 million of NJEIT loans).

Affirmation of the negative outlook reflects the town's lack of a long-term solution to its outsized debt burden and debt service, and uncertainties regarding the amounts and timing of projected developer PILOT payments and expected developer reimbursements. It also considers the challenges the town may face in securing additional state and county support for meeting future debt obligations.

OUTSIZED ENTERPRISE-RELATED RISK; SHARP INCREASE IN DEBT RELATED TO REDEVELOPMENT PROJECTS WITH UNMATCHED INCREASE IN REVENUES

In 2006 the Hudson County Improvement Authority (HCIA), a conduit issuer with no independent taxing authority, issued $39.4 million in bonds for the Harrison stadium land acquisition project, property which was developed as the future home of the New York Red Bulls of Major League Soccer. While lease payments from the Town of Harrison to the HCIA are expected to be the source of bond repayment, the bonds are ultimately backed by an unconditional general obligation guarantee of Hudson County (G.O rated Aa3/negative outlook). Town management initially projected that ongoing redevelopment efforts in the area surrounding the stadium, through increased PILOT payments, would provide the source of payment for debt service to begin on December 15, 2010. However, the economic downturn caused these PILOT payments to be lower than anticipated. Harrison initially projected PILOT payments to the town would be $2.3 million in 2008 with the expectation that they would ramp up to levels approximating $11.5 million in 2011. Actual PILOTs collected over the last three years have been approximately $980,000 in 2009, and $1.1 million in both 2010 and 2011. When the debt began to amortize in 2010, Harrison privately issued a one-month note in order to meet the first $3.1 million debt service payment due December 15th. Subsequently, the HCIA issued bond anticipation notes in January 2011 backed by the general obligation pledge of Hudson County. A portion of those proceeds were used to repay the holder of the Harrison-issued note. The town plans to borrow an additional $3.1 million from the HCIA in order to meet its December 15, 2011 debt service obligation.

The issuance of the $39.4 million of county-guaranteed CABs in 2006 and approximately $14.4 million of New Jersey Environmental Infrastructure Trust Loans in 2009, combined with $8.5 million of additional school debt, caused Harrison's debt burden to jump to 8.8% by year-end fiscal 2009 from 4.2% of equalized valuation in fiscal 2005. Debt burden increased again in 2010 to an extremely high 10.1% of equalized valuation following the issuance of notes to pay 2010 county-guaranteed debt service. Similarly, debt service has risen to 13% of fiscal 2010 expenditures from 6.3% in fiscal 2008 and comprises 16% of the fiscal 2011 introduced budget. Despite the rapid increase in debt service, Harrison has not raised its levy sufficiently to meet the additional debt service nor does it currently maintain plans to do so in the medium-term. Rather, it continues to anticipate that PILOT revenues will sufficiently cover debt service. Nearly all projects intended to generate PILOTs for debt service remain delayed year-to-date, with the exception River Park, which is 50% complete and Building 1 of Harrison Commons.

We believe that in the absence of sufficient PILOT revenues for developer-related debt service, developer guarantees provide a moderate level of additional security. Debt related to developers, which was intended to be repaid with PILOTs, include the 2006 county-guaranteed CABs, 2009 NJEIT loans totaling $14.4 million and a county-guaranteed Redevelopment Area Bond note of $8.5 million. Although projects intended to generate PILOTs for NJEIT debt service have not yet begun, as previously anticipated, developers have fulfilled guarantees in 2010 and year-to-date in 2011 by providing sufficient debt service reimbursements to the town. The developer guarantees include an annually renewable letter of credit and joint and several obligation. The project tied to Harrison's county-guaranteed RAB (Harrison Commons) has begun construction and is expected to be completed by September 2011. The town plans to refund the notes with long-term bonds in 2012 as PILOT revenue is realized. Although debt service for county-guaranteed CABs does not benefit from developer guarantees and the modest amount of annual PILOT revenues that are being generated have not been applied toward principal payment, the county general obligation pledge provides additional security. The NJEIT loans do not carry a county guarantee.

SHARP EROSION OF FINANCIAL FLEXIBILTY IN FISCAL 2010 AND INCREASED DEPENDENCE ON CASH FLOW BORROWING FOR OPERATIONS; RECENTLY DEMONSTRATED POOR MARKET ACCESS

We believe Harrison may be challenged to meet debt service payments given the town's weak liquidity and dependence on the capital markets for cash flow borrowing, coupled with its poor market access. In fiscal 2010 (unaudited), the town drew down nearly all Current Fund balance to a very narrow $26,000 or 0.7% of revenues from a satisfactory $3.9 million or 10.5% of revenues in fiscal 2009. The draw represents a structural imbalance of 8% of the fiscal 2010 budget, which the town is challenged to close in the introduced fiscal 2011 budget. As a result of the use of Current Fund balance , cash has declined to $6.4 million or 16.7% of revenues (net of Tax Anticipation Note proceeds), driving a larger than anticipated TAN issuance of $8.5 million for the fiscal 2011 budget. The note matures December 2011, unlike the fiscal 2010 note, which matured after the fiscal 2010 fiscal year in February 2011.

We believe Harrison's increased reliance on the capital markets for cash flow purposes presents another significant uncertainty given the town's very poor market access in 2011. Notably, Harrison did not issue tax anticipation notes (TANs) in 2009 after issuing $6 million in TANs in both fiscal years 2007 and 2008. However, it did resume the practice in fiscal 2010 by issuing $6 million in TANs. Prior to fiscal 2011, the town negotiated note placements with a commercial bank; however the bank chose not to renew in 2011 when Harrison issued BANs and TANs in March and April, respectively. With only one bidder on each note from the same investor, uncertainties arise around the town's ability to secure access to the market in fiscal 2012 and ahead. Given stressed fiscal 2012 cash flow projections, we believe a failed TAN sale in 2012 would severely challenge the town to make timely debt service without alternative financing.

Poor market access may also affect the refunding of $5.6 million in general obligation BANs that come due in August 2012. In order to mitigate market access risk, the town has applied to the State of New Jersey Local Finance Board for participation in the Municipal Qualified Bond Program. The state will review the application this June. Aside from these notes, the town only maintains a RAB note held by the Hudson County Improvement Authority. If the town is accepted into the state's qualified bond program, it would have to issue new money or refund and reissue outstanding series to place them into the program; outstanding debt is not automatically in the program.

Looking ahead, the introduced fiscal 2011 budget aggressively assumes $2.9 million of property tax revenue from the Red Bull stadium and $1 million of land sale proceeds, for which a buyer has not yet been secured. In fiscal 2010, the New York Red Bulls failed to pay approximately $1.4 million of property taxes due to Harrison, legally challenging its status as a taxable property. The fiscal 2011 budget anticipated Red Bull 2010 property tax revenue as a delinquent tax as well as $1.4 million of current taxes due in 2011. We believe the town may not receive these monies prior to year-end. Without significant current year expenditure savings, Harrison will be severely challenged to maintain a positive fund balance as well as current, albeit very narrow, liquidity levels.

DEVELOPMENT EFFORTS REMAIN STALLED; MODEST TAX BASE WITH BELOW-AVERAGE WEALTH LEVELS

Approximately one-third of Harrison has been designated as a redevelopment area. The town is attempting to leverage its location in western Hudson County, just north of Newark (G.O. rated A3/negative outlook), with proximity to New York City (G.O. rated Aa2/stable outlook). Equalized value per capita grew at a healthy five-year annual average rate of 12.6% through 2008, indicative of strong market value appreciation, before declining 14.7% in fiscals 2009 and 2010. Management initially projected PILOTs to the town at $2.3 million in 2008 with the expectation that they would increase to levels approximating $11.5 million in 2011. However, given the economic downturn, development has slowed and, as indicated above, PILOT payments have been significantly less than originally projected, most severely at less than 10% of expectations in fiscal 2011. Additionally, the town had been looking to the stadium for the Red Bulls professional soccer team, which was projected to open in the summer of 2008 but was delayed to 2010, to spur development and PILOT revenue. Income and wealth levels in Harrison are well-below the state medians, with per capita and median family income at 68.5% and 74.2% of the state levels, respectively, and equalized value per capita of $77,882.

Outlook

Assignment of the negative outlook reflects the town's future ability to access the capital markets for cash flow purposes, the lack of a long-term solution to an outsized debt burden and substantial near-term debt service, and uncertainties regarding the amounts and timing of projected developer PILOT payments and expected reimbursements. It also considers difficulties the town may face in securing additional state and county support for meeting future debt obligations as well as our belief that redevelopment efforts are likely to proceed slower than originally projected over the near-term.

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

*An increase in PILOT payments by fiscal 2012 sufficient to pay debt service

*Growth in the tax base from renewed development efforts

*Improved market access demonstrated by multiple bids for short-term notes

*Adoption of conservatively structured budgets

WHAT COULD MOVE THE RATING DOWN:

*Lack of future market access

*Any inability to execute a financing plan to meet debt service payments on the stadium land acquisition bonds

*Use of PILOT payments for town operations rather than for debt service, as was originally intended

*Continued reliance on short-term borrowing to pay debt service

*Future debt issuances that materially increase the town's debt burden

*Increased cash flow borrowing in relation to the budget

*Further deterioration of the town's tax base

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.

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Analysts

Josellyn Yousef
Analyst
Public Finance Group
Moody's Investors Service

Walter Pitts
Backup Analyst
Public Finance Group
Moody's Investors Service

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

Jack Dorer
Director
Public Finance Group
Moody's Investors Service

Contacts

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MOODY'S DOWNGRADES TO Ba3 FROM Baa1 THE G. O. RATING FOR THE TOWN OF HARRISON (NJ); AFFIRMS NEGATIVE OUTLOOK
No Related Data.
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