One notch downgrade applies to $2.4 billion of GO debt and $29.8 billion of appropriation-backed and GO-related debt
NOTE: On May 15, 2014, the press release was corrected as follows: Removed NJEDA Designated Industries Economic Growth and Development Bonds from the LIST OF BONDS AFFECTED BY RATING AND OUTLOOK CHANGE. Revised release follows.
SUMMARY RATINGS RATIONALE
The downgrade to A1 reflects the weakened financial position resulting
from recurring revenue shortfalls and ongoing reliance on non-recurring
resources that have deferred structural imbalances into future years.
Additionally, high and rapidly-growing fixed costs have pressured
the budget and limited the state's flexibility to make structural
changes that would improve long-term budget balance. As
a result, the state's liquidity position has weakened to levels
that provide minimal cushion against budget surprises. The A1 rating
also incorporates New Jersey's diverse economy and high wealth levels,
as well as the executive's broad powers to reduce expenditures.
The negative outlook reflects the expectation that New Jersey's
structural imbalance will increase for the fiscal 2015 budget, and
that budget solutions will be increasingly difficult. With the
ongoing pressure of statutorily scheduled pension contribution increases
and lagging economic performance, the state will be challenged to
improve its weak liquidity position.
STRENGTHS
-- High resident wealth levels and diversified economy
-- Broad, proven executive powers to reduce expenditures
-- Proactive reform of pension and OPEB liabilities,
although gradual approach will increase liabilities over time
CHALLENGES
-- Three consecutive years of weak budget to actual performance
-- Structural budget imbalance exacerbated by rapidly growing
pension and OPEB costs
-- Narrowed reserves and weakened liquidity, with
no specified plan to rebuild balances
-- Absence of certain best governance practices such as
multi-year forecasting, and a constitutionally-required
revenue forecasting process that is weaker than peers
OUTLOOK
The outlook on New Jersey's general obligation and appropriation-backed
credits is negative, based on the expectation that the state's
structural imbalance will increase going into the fiscal 2015 budget,
and that solutions will be increasingly challenging. Combined with
its sluggish economic recovery and the ongoing pressure of statutorily
scheduled pension contribution increases, the state will be challenged
to restore its weak liquidity position.
WHAT COULD MAKE THE RATING GO UP (revise the outlook to stable)
-- Sustained improvement in liquidity position
-- Higher-than-projected, sustained
revenue growth that materially eases the budgetary pressure of growing
fixed costs
-- Sustained progress in structurally balancing the state's
budget
WHAT COULD MAKE THE RATING GO DOWN
-- Increased reliance on structurally-unsound budget
management actions, including optimistic revenue assumptions,
and nonrecurring or uncertain budget solutions
-- Lack of progress in absorbing rapidly growing pension
and OPEB costs
-- Failure to restore liquidity position
-- Deepening economic stagnation or a significant increase
in the state's debt position
LIST OF BONDS AFFECTED BY RATING AND OUTLOOK CHANGE
State of New Jersey General Obligation Bonds (A1)
State of New Jersey Certificates of Participation (A2)
New Jersey Building Authority appropriation-backed bonds (A2)
New Jersey Economic Development Authority (NJEDA) appropriation-backed
bonds (A2, essential asset)
NJEDA Business Employment Incentive Program Bonds (A3)
New Jersey Education Facilities Trust Fund appropriation-backed
bonds (A2)
New Jersey Transportation Trust Fund Authority appropriation-backed
bonds (A2)
South Jersey Port Corporation appropriation-backed bonds (A2)
Garden State Preservation Trust bonds (A1)
New Jersey Health Care Facilities Financing Authority appropriation-backed
bonds (A2)
New Jersey Sports and Exposition Authority appropriation-backed
bonds (A3)
Chapter 12 County College Bond Program (A2)
Local Government State Aid Intercept Programs:
-- New Jersey Municipal Qualified Bond Program (A2)
-- New Jersey Qualified School Bond Program (A2)
The principal methodology used in the underlying rating was US States
Rating Methodology published in April 2013. An additional methodology
used in rating the appropriation-backed bonds was The Fundamentals
of Credit Analysis for Lease-Backed Municipal Obligations published
in December 2011. The principal methodology used in the enhanced
rating was State Aid Intercept Programs and Financings: Pre and
Post Default published in July 2013. An additional methodology
used in the enhanced rating was US States Rating Methodology published
in April 2013. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
REGULATORY DISCLOSURES
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 rating action on the support provider and in relation to each particular
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 Blakeslee Emery Larsen
Vice President - Senior Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Edward Hampton
Vice President - Senior Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades New Jersey's GO bonds to A1 from Aa3; outlook is negative