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Rating Action:

Moody's downgrades New Jersey's GO bonds to A1 from Aa3; outlook is negative

13 May 2014

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
No Related Data.
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