New York, August 11, 2016 -- Issue: Biomedical Research Facilities Bonds, Series 2016A; Rating: A3; Rating Type: Underlying LT; Sale Amount: $50,000,000; Expected Sale Date: 08/16/2016; Rating Description: Lease Rental: Appropriation;
Summary Rating Rationale
Moody's Investors Service has assigned an A3 rating to New Jersey's $50 million of Biomedical Research Facilities Bonds, Series 2016A, issued through the NJ Economic Development Authority. Moody's has also affirmed New Jersey's A2 general obligation rating and the negative outlook. The ratings on the state's appropriation-backed debt, other GO-related debt, and intercept programs have also been affirmed. The outlook on the motor vehicle surcharge special tax bonds has also been revised to negative, reflecting the need for legislative appropriation (see detailed list of ratings below).
The A2 GO rating is based on the state's weak but relatively stable current budgetary condition, structural imbalance due to large pension contribution shortfalls, a moderately growing economy, and high debt position, including its growing unfunded pension liability. The A2 rating also incorporates New Jersey's diverse economy and high wealth levels, as well as the governor's broad powers to reduce expenditures.
We expect the state's pension-related fiscal imbalance to remain large in the medium term, weakening the ability to build reserves and increasing the unfunded pension debt. In addition, the state's plans to absorb steep contribution increases over the next six years rely on savings from health benefit reforms, which may be slow to implement since large-scale reform is currently stalled, and continued revenue growth which has averaged only 3% since the recession ended.
The A3 Economic Development Authority rating is notched off the state's A2 GO rating, reflecting the need for annual legislative appropriation of the state contract payments. A large majority of the state's net tax-supported debt is subject to appropriation, and the importance of maintaining access to the capital markets provides strong incentive for the state to make these appropriations.
The negative outlook reflects our expectation that the state's budget will be increasingly challenged by growing pension contributions in a low revenue growth environment and that the state's balance sheet will weaken further before structural balance is restored. The outlook on the Motor Vehicle Surcharge bonds has been revised to negative reflecting the need for legislative appropriation of dedicated revenues. Given the appropriation requirement, these special tax bonds will not be rated higher than the state's other appropriation debt.
Factors that Could Lead to an Upgrade
Improved pension contributions, far greater than the current 1/10 plan, that stabilize pension liability growth Near-term reduction in structural imbalance through sustainable budget improvementsSustained improvement in budgetary balances and liquidity
Factors that Could Lead to a Downgrade
Indications that low revenue growth or high cost growth will make the 1/10 pension contributions increases unaffordable and increase the risk of additional underfundingIncrease in structural imbalance Reduced liquidity levels and/or increased liquidity support (cash-flow borrowing and other cash management tactics) A significant increase in unfunded pension liabilities, for example due to weak investment returns
BONDS SECURED BY STATE CONTRACT PAYMENTS The bonds are payable solely from anticipated state contract payments to be made by the State of New Jersey. The A3 rating, reflecting the need for annual legislative appropriation of the lease contract payments, is notched off of the state's A2 general obligation bond rating. Once the legislature has appropriated the funds, the state's lease payment obligation is absolute and unconditional, regardless of project occupancy or completion.
In the event of a failure by the legislature to appropriate sufficient funds for debt service, there are no substantive remedies available to the authority or to bondholders, and there is no debt service reserve fund associated with the bonds. However, debt service payment dates on June 15 and December 15 mitigate potential risk that might arise from a delay in annual budget adoption. In addition, approximately 84% of New Jersey's net tax-supported debt is subject to appropriation. The importance of maintaining access to the capital markets provides strong incentive for the state to make these appropriations.
Use of Proceeds
Bond proceeds will finance the planning and construction of a biomedical research facility, including instructional and clinical space, research offices and laboratories owned by Rutgers University and located in Camden, NJ.
New Jersey is the 11th largest state by population in the United States. Its gross domestic product per capita ranks 8th among the states (in current dollars).
List of Bonds Affected by Rating Action
State of New Jersey General Obligation Bonds (A2)
Garden State Preservation Trust bonds (A2)
State of New Jersey Certificates of Participation (A3)
New Jersey Building Authority appropriation-backed bonds (A3)
New Jersey Economic Development Authority (NJEDA) appropriation-backed bonds (A3)
New Jersey Education Facilities Trust Fund appropriation-backed bonds (A3)
New Jersey Transportation Trust Fund Authority appropriation-backed bonds (A3)
South Jersey Port Corporation bonds (A3)
New Jersey Health Care Facilities Financing Authority appropriation-backed bonds (A3)
New Jersey Sports and Exposition Authority appropriation-backed bonds (Baa1)
Chapter 12 County College Bond Enhancement Program (A3)
NJEDA Motor Vehicle Surcharge bonds (A3, outlook revised to Negative)
Local Government State Aid Intercept Programs:
-- New Jersey Municipal Qualified Bond Program (A3)
-- New Jersey Qualified School Bond Program (A3)
The principal methodology used in the general obligation rating was US States Rating Methodology published in April 2013. The additional methodology used in the lease was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. The principal methodology used in rating the special tax bonds was US Public Finance Special Tax Methodology published in January 2014. The principal methodology used in the qualified enhancement program ratings was State Aid Intercept Programs and Financings: Pre and Post Default published in July 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.
For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
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