New York, April 13, 2020 -- Moody's Investors Service has affirmed the A3 rating on the State of New Jersey's general obligation debt and revised the outlook to negative. Moody's has also affirmed the State's A3 rated bonds issued by the Garden State Preservation Trust, NJ; the Baa1 and Baa2 rated appropriation backed debt; Baa1 rated moral obligation debt issued by the South Jersey Port Corporation; and Baa1 rated New Jersey Municipal Qualified Bond Program, New Jersey Qualified School Bond Program and New Jersey County College Enhancement Bond Program Chapter 12 intercept programs; the Baa1 and Baa2 rated Motor Vehicle Surcharge bonds issued by the New Jersey Economic Development Authority (NJ EDA); and the Baa1 rating on the New Jersey Transportation Trust Fund Authority's Federal Highway Reimbursement Revenue Notes (GARVEEs). The outlook on all bonds has been revised to negative from stable. The affirmation and outlook change affect approximately $35.9 billion of rated debt.
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM906402714 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
The affirmation of New Jersey's ratings and revision of the outlook to negative from stable reflects the impact of the coronavirus crisis on the state and our expectation that the crisis will have substantial impacts on state finances and the economy, straining its ability to structurally balance its budget and elevating already-high liabilities. The rating action also incorporates the mitigating impacts of substantial federal emergency assistance, which will stabilize near-term liquidity needs and bolster household income and spending and therefore tax revenue. Federal assistance will also reimburse the state for coronavirus-related spending, increase Medicaid reimbursements and create significant direct lending from the Federal Reserve Bank.
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and financial market declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
The A3 rating reflects New Jersey's large, diverse and wealthy economy offset by significant long-term liabilities and the multi-year burden of rapidly-rising pension contributions, which are the result of significant historic pension underfunding. New Jersey's finances have improved notably in the past two fiscal years, but remain weak compared to peers with low fund balances and high fixed costs. As a result, the state has less flexibility to manage the current coronavirus-related economic disruption. The governor's broad powers to reduce expenditures are an important, proven budget tool.
The A3 rating on the Garden State Preservation Trust bonds is based on the state's contractual obligation to transfer a constitutionally-dedicated portion of the state-wide sales tax (the first $98 million) to the trust for debt service, subject to annual appropriation. Risk of non-appropriation is mitigated by the constitution and subsequently-adopted legislation restricting the use of the allocation to debt service payment of these bonds. The strength of the dedication and the ample coverage provided by dedicated revenues that are the state's second largest source of operating support result in a rating equivalent to state's general obligation rating. However, the rating is capped at the state's GO due to the lack of structural and mechanical separation of the dedicated revenue stream from the state's General Fund and the technical requirement for annual appropriation.
The Baa1 ratings on the majority of the state's appropriation debt and the County College Enhancement Program Chapter 12 are notched off the State of New Jersey's A3 GO rating, reflecting the strong legal structure, the essential nature of the financed projects and the need for annual legislative appropriation of revenues to pay debt service. 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 on essential assets.
The Baa2 rating on the state's appropriation debt issued through the New Jersey Sports & Exposition Authority reflects appropriation risk and the lower essentiality of the racetrack, convention center and stadium projects that were financed with bond proceeds.
The Baa1 ratings on the South Jersey Port Corporation senior lien and subordinate lien bonds are notched off the State of New Jersey's A3 GO rating and reflect the state's commitment, as established in the corporation's enabling act and bond resolutions, to consider appropriating funds to replenish the port's debt service reserve fund (DSRF) to match maximum annual debt service. The state has a strong, demonstrated commitment to making these appropriations, given its 34-year history of replenishing the corporation's reserve fund; the state's history of including broad appropriation language in the budget, which is historically adopted well in advance of the corporation's December 1 request date, and the state's non-impairment pledge. The state's replenishment commitment is equivalent for both liens, and state appropriations deposited into the subordinate lien DSRF cannot be transferred to the senior lien DSRF. Nothing requires the legislature to appropriate proportionately to the two liens' DSRFs. However, the risk of inequivalent appropriations does not warrant a full notch rating distinction.
The Baa1 programmatic ratings on the Qualified School Bond Program and the Municipal Qualified Program are notched off the State of New Jersey's A3 GO rating. The one notch distinction reflects the programs' strong position in the state's hierarchy of debt and spending priorities and strong program mechanics, including the direct payment of aid to the debt service trustee.
The Baa1 (Sr) and Baa2 (Sub) ratings on the New Jersey Economic Development Authority's Motor Vehicle Surcharge bonds reflects i) the need for legislative appropriation of pledged revenues and ii) relatively weak pledged revenue fundamentals including a very narrow revenue base and steadily declining revenue trend. The additional notch for the subordinate bonds also includes additional revenue risk due to weaker aggregate coverage levels. Revenue weaknesses are somewhat balanced by the strong statewide base for levying motor vehicle fines, the closed lien and adequate senior lien coverage that remains resilient through reasonable stress scenarios. The senior lien bonds are also supported by the relatively short final maturity (in fiscal 2027). The weaker subordinate lien coverage is somewhat balanced by the closed lien, the turbo feature on the last five maturities that will likely decrease future debt service and reduce revenue risk, as well as an Advance Account that provides liquidity against a timing mismatch between revenue collection and debt service payments.
The Baa1 rating on the NJ Transportation Trust Fund Authority's (NJ TTFA) Federal Highway Reimbursement Revenue Notes (GARVEEs) incorporates the appropriation requirement for pledged revenues, satisfactory coverage by pledged federal highway aid, a strong 3x additional bonds test and a requirement that pledged revenues first fulfill all annual debt service requirements, once appropriated. The Baa1 rating also incorporates the relatively long final maturity that spans multiple authorizations of the federal aid highway program and, similar to most GARVEE programs, the lack of structural protection against disruption in federal highway aid, such as a debt service reserve fund. NJ TTFA's GARVEEs are capped at the same level as the state's other appropriation debt, due to the requirement that pledged revenues be appropriated by the New Jersey state legislature to pay debt service, together with the lack of legal constraints on the use of federal reimbursements. Certain characteristics of the GARVEE credit and structure, including the motivation to maintain the existing federal reimbursement funding and spending cycle, provide the state with a strong incentive to appropriate. Other similarly-structured GARVEE bonds with no requirement for legislative appropriation are rated in the mid- to high A category.
RATING OUTLOOK
The negative outlook reflects the expectation that the state will have difficulty balancing fiscal 2020 and fiscal 2021 budget gaps given its low reserves and pre-existing structural budget imbalance. The state's fiscal recovery will be multi-year, as revenues slowly recover to prior highs while scheduled pension contributions continue to ramp up. In addition, if recent stock market volatility persists, the state's unfunded pension liability will grow, further elevating fixed costs.
Resolution of the negative outlook will depend on the depth and duration of the coronavirus-related economic disruption and on the state's budget balancing actions, and will consider any resulting decline in reserves, increased debt and pension levels and/or growth in the structural budget gap.
The outlook on all GO-related and notched debt listed above is negative, reflecting the outlook on the state GO.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
For the GO rating:
- Implementation of structurally balanced actions to close the fiscal 2020 and fiscal 2021 budget gaps
- Continuation of planned pension contributions, in line with the current 1/10 plan
- Maintenance of budgetary balances and liquidity
- Relatively stable debt and pension metrics, and fixed cost increases that remain affordable
For all GO-related and notched debt:
- An upgrade of the GO rating
For the NJ EDA Motor vehicle surcharge bonds:
- Both an upgrade of the state G.O. and a sustained increase in pledged revenue collections that bolsters debt service coverage, and/or substantially shortens final maturity
For the NJ TTFA GARVEE bonds:
- Both an upgrade of the state's G.O. rating and an increase in MADS debt service coverage
- The addition of stronger indenture covenants limiting additional bond issuance
- The addition of structural protections to bridge a potential federal authorization gap
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
For the GO rating:
- Multi-year increase in structural imbalance, related to pension contribution shortfalls or other non-recurring budget solutions
- Significantly reduced liquidity levels and/or increased liquidity support (cash-flow borrowing and other cash management tactics)
- A significant increase in unfunded pension liabilities that elevates fixed costs
For all GO-related and notched debt:
- An upgrade of the GO rating
For the South Jersey Port Corporation bonds:
- Also, Indications that the state's incentive to make annual appropriations has diminished
For the NJ EDA Motor vehicle surcharge bonds:
- Either a downgrade of the state or accelerated declines in pledged revenues, beyond current baseline projections, that deteriorate coverage
For the NJ TTFA GARVEE bonds:
- A downgrade of the state's G.O. rating
- Discontinuation or reduction in federal transportation grant program
- Lapse in reauthorization of transportation spending
- Sharp decline in underlying HTF revenues caused by economic stress, tax inefficiency or redirection of fuel taxes to general fund
- Significant additional leverage that reduces coverage materially from historical levels
LEGAL SECURITY
New Jersey's G.O. bonds are general obligations of the state, secured by the full faith and credit of the state.
The Garden State Preservation Trust bonds are secured by the state's contractual obligation to transfer a constitutionally-dedicated portion of the state-wide sales tax (the first $98 million) to the trust for debt service, subject to annual appropriation.
The state's various appropriation-backed bonds, including the Chapter 12 intercept bonds, are payable solely from anticipated state payments made pursuant to a contract, lease or funding agreement, subject to annual legislative appropriation. Once the legislature has appropriated the funds, the state's payment obligations are absolute and unconditional.
The South Jersey Port Corp senior and subordinate lien bonds are secured first by a senior and subordinate lien, respectively, on net revenues of the port corporation's operations. All senior and subordinate bonds are additionally secured by - and primarily paid from - the state's commitment to annually appropriate amounts sufficient to restore the debt service reserve fund (DSRF) to the required level. The state's replenishment commitment is equivalent for both liens, and state appropriations deposited into the sub lien DSRF cannot be transferred to the senior lien DSRF. While the state's replenishment commitment is equivalent for both liens, nothing requires the legislature to appropriate proportionately to the two liens' DSRFs.
The Qualified School Bond Program and the Municipal Qualified Program intercept programs provide credit enhancement to participating schools and municipalities through the diversion of state aid revenues directly to a trustee to ensure timely debt service payments, and thereby prevent debt service obligations from competing with other local expenditure priorities.
The senior and subordinate lien NJ EDA motor vehicle surcharge bonds are secured by motor vehicle surcharges and unsafe driver surcharges, subject to legislative appropriation. After appropriation, the pledged revenues will be transferred monthly to the EDA by the state Treasurer pursuant to state statute and a contract between the two parties.
The NJ TTFA GARVEE bonds' source of pledged revenues is Federal Title 23 funding received by the state under the Federal Aid Highway Program, subject to state legislative appropriation. The HTF receives revenues from national excise taxes on gasoline and other vehicle taxes established under periodic reauthorization by Congress. HTF funds are used to reimburse states for eligible road and transportation capital project costs according to formulas that take into account population and other factors.
PROFILE
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).
METHODOLOGY
The principal methodology used in the general obligation and general obligation related ratings was US States and Territories published in April 2018 and available at https://www.moodys.com/research/US-States-and-Territories--PBM_1084466. The principal methodology used in the special tax ratings was US Public Finance Special Tax Methodology published in July 2017 and available at https://www.moodys.com/research/US-Public-Finance-Special-Tax-Methodology--PBM_1077147. The principal methodology used in the appropriation, moral obligation bonds and NJ County College Enhancement Program Chapter 12 was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1102364. The principal methodology used in the intercept programs was State Aid Intercept Programs and Financings published in December 2017 and available at https://www.moodys.com/research/State-Aid-Intercept-Programs-and-Financings--PBM_1067422. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
The List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM906402714 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:
- EU Endorsement
- Disclosure to Rated Entity
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website 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.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating outcome announced and described above.
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.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Baye Larsen
Lead Analyst
State Ratings
Moody's Investors Service, Inc.
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Marcia Van Wagner
Additional Contact
State Ratings
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Client Service: 1 212 553 1653
Releasing Office:
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