New York, September 14, 2016 -- Issue: Revenue and Revenue Refunding Bonds, Series 2016 S-1; Rating: A3; Rating Type: Underlying LT; Sale Amount: $32,225,000; Expected Sale Date: 09/30/2016; Rating Description: Lease Rental: Appropriation;
Issue: Revenue Refunding Bonds, Series 2016 S-2 (AMT); Rating: A3; Rating Type: Underlying LT; Sale Amount: $7,535,000; Expected Sale Date: 09/30/2016; Rating Description: Lease Rental: Appropriation;
Summary Rating Rationale
Moody's Investors Service has assigned an A3 rating to New Jersey's $40 million of Revenue and Revenue Refunding Bonds, Series 2016 S-1 and 2016 S-2, issued by the South Jersey Port Corporation. The A3 reflects the State of New Jersey's (A2 negative) commitment, as defined in the corporation's enabling act and resolution, to annually appropriate and transfer to the port amounts sufficient to restore the debt service reserve fund to the required level (equivalent to maximum annual debt service). Because these transfers require annual legislative appropriation, the rating is notched off of the state's A2 general obligation rating. The A3 rating is also supported by the state's demonstrated commitment to make these appropriations, given its 34-year history of replenishing the corporation's reserve fund; the state's history of including 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 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 bonds carry the outlook of the state. The state's negative outlook reflects our expectation that its 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.
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 improvements
Sustained 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 underfunding
Increase 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 ADDITIONALLY SECURED BY DEBT SERVICE RESERVE FUND, ANNUALLY REPLENISHED WITH STATE APPROPRIATIONS
The bonds are secured first by the net revenues of the port corporation's operations. The A3 rating is based on additional security provided by the state's commitment to annually appropriate an amount sufficient to restore the debt service reserve fund to the required level. The trustee-held debt reserve fund is required to equal maximum annual debt service on all outstanding bonds.The chairman of the corporation is required to make a certification to the governor on or before December 1 of the amount necessary to restore the reserve fund to maximum annual debt service on outstanding bonds subsequent to the upcoming January 1 debt service payment. The governor, upon certification, is required to request that an appropriation be made by the legislature during the current state fiscal year, that is, before June 30th following the certification. The state's commitment to these bonds is further strengthened by its practice of including a contingent appropriation in its annual appropriation act so that, upon receipt of a deficiency notice, the state can make the certified payment directly into the bond account of the debt reserve fund without further legislative action. The state has a long history of making timely annual appropriations to replenish the corporation's debt service reserve fund. The first state appropriation for the corporation was made in 1972, and the state has appropriated every year since 1989. After the issuance of the Series 2009 bonds, the state's annual appropriation has averaged $18.5 million since fiscal 2011. Compared to the state's approximately $34.5 billion fiscal 2017 budget, this commitment remains relatively small; maximum annual debt service of total corporation debt is $24.9 million in fiscal 2017. Additional borrowing that would further increase the debt service reserve requirement must be reviewed and approved by the state.The port corporation was created as an instrumentality of the state in 1968 and operates as a body politic within the State Department of the Treasury. The Board of Directors consists of 10 members appointed by the governor, in addition to the state treasurer.
Use of Proceeds
Proceeds will refund outstanding port corporation revenue bonds, and partially finance the port's 2016 capital plan including dredging and replacement of fire suppression systems.
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).
The principal methodology used in this rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
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