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Rating Action:

Moody's assigns Baa1 to New Jersey's School Facilities Construction Bonds, 2019 Ser. LLL, MMM, NNN Bonds; outlook stable

24 Oct 2019

New York, October 24, 2019 -- Moody's Investors Service has assigned a Baa1 rating to New Jersey's $350 million School Facilities Construction Bonds, 2019 Series LLL, $97.2 million School Facilities Construction Refunding Bonds, 2019 Series MMM and $335.2 million School Facilities Construction Refunding Bonds, 2019 Series NNN (Federally Taxable) issued by the New Jersey Economic Development Authority (EDA). The outlook is stable.

RATINGS RATIONALE

The Baa1 rating, one notch down from New Jersey's A3 general obligation bond rating, reflecting the more essential nature of the project financed with the bonds and the moderate legal structure that includes the need for annual legislative appropriation of state lease rental payments equal to 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. However, bondholders do not have a direct lien on dedicated revenues and there are no remedies in event of non-appropriation.

The A3 general obligation rating is based on 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. The state's near-term budget flexibility and structural balance improved in fiscal 2019 but remain weak compared to peers and leave future budgets dependent on additional tax increases or continued economic growth that may be uncertain. In the event of future downturns, the governor's broad powers to reduce expenditures is an important, proven budget tool.

RATING OUTLOOK

The outlook is based on the state. New Jersey's stable outlook reflects our view that the current A3 general obligation rating is well positioned for the next 12-18 months due to solid economic performance and improved budget flexibility in fiscal 2019. However, in the longer term, the state's credit profile could continue to weaken as large long-term liabilities grow and the state's budget is challenged by growing pension contributions in a low revenue growth environment.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Increased pension contributions, greater than the current 1/10 plan, that stabilize growth in the Adjusted Net Pension Liability (ANPL)

- Improved economic trends that support revenue growth above the state's five-year average

- 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 contribution increases unaffordable and heighten 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

LEGAL SECURITY

The bonds are payable solely from anticipated lease contract payments to be made by the State of New Jersey. The state's lease payment obligation is absolute and unconditional once the legislature has appropriated sufficient funds for debt service each year.

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 80% 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.

There are approximately $9.8 billion of bonds outstanding under New Jersey's school facilities program. Although the authority may issue additional bonds secured on a parity basis under the resolution, the enabling act limits the amount of outstanding debt. This provision could be amended by the legislature, although there are no plans to do so.

USE OF PROCEEDS

Proceeds of the Series LLL bonds will finance K-12 school facilities projects throughout the state. Proceeds of the Series MMM and NNN bonds will refund outstanding bonds for net present value savings with no extension of maturity.

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 these ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Timothy Blake
Additional Contact
Municipal Supported Products
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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