NOTE: On August 27, 2018, the List of Affected Credit Ratings accessible via hyperlink from this press release was corrected to include New Jersey Economic Development Authority, Economic recovery fund (state contract) Series '92A & B.
On March 28, 2017, the list of affected credit ratings accessible via hyperlink from this press release was corrected as follows: In the Principal Methodology column, “US States Methodology” was changed to “US States Rating Methodology.”
New York, March 27, 2017 -- Summary Rating Rationale
Moody's Investors Service has downgraded to A3 from A2 New Jersey's general obligation rating. The ratings on the state's appropriation-backed debt, other GO related debt, moral obligation debt, intercept programs and certain special tax bonds that require state appropriation have also been downgraded by one notch. The downgrade affects approximately $37 billion of rated debt. The outlook on the state's ratings has also been revised to stable.
The downgrade to A3 reflects the continued negative impact of significant pension underfunding, including growth in the state's large long-term liabilities, a persistent structural imbalance, and weak fund balances. Despite the state's significant increases in pension contributions since fiscal 2012, contributions remain well below the actuarial recommended contribution and unfunded pension debt continues to grow. The downgrade also reflects the expectation that the statutory pension contribution schedule will be increasingly difficult to meet given the lack of structural budget adjustments to incorporate General Fund tax reductions that took effect in January 2017 (Chapter 57) and the state's reliance on optimistic revenue growth assumptions to balance the budget. Without balancing actions, the recent tax cuts will reduce revenues by $1.1 billion by fiscal 2021 and strain the state's ability to resolve its large structural imbalance in the near term.
The A3 GO rating is based on the state's weak budgetary condition and liquidity position, structural imbalance due to large pension contribution shortfalls, a moderately growing economy, and high debt position, including its growing unfunded pension liability. The A3 rating also incorporates New Jersey's diverse economy and high wealth levels, as well as the governor's broad powers to reduce expenditures.
The one notch rating downgrade for the issuances listed at the bottom of this report reflects the maintenance of existing notching from the state's GO rating.
The stable outlook reflects that the current A3 rating is well positioned for the next 12-18 months due to solid economic performance and the expectation that any fiscal 2017 budget gaps will remain manageable. However, in the longer term, the state's credit profile will 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
- 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
New Jersey's GO bonds are general obligations of the state, secured by the full faith and credit of the state.
Use of Proceeds
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).
List of Bonds Affected by Rating Action
State of New Jersey General Obligation Bonds (A3)
Garden State Preservation Trust bonds (A3)
State of New Jersey Certificates of Participation (Baa1)
New Jersey Building Authority appropriation-backed bonds (Baa1)
New Jersey Economic Development Authority (NJEDA) appropriation-backed bonds (Baa1)
New Jersey Education Facilities Trust Fund appropriation-backed bonds (Baa1)
New Jersey Transportation Trust Fund Authority (TTFA) appropriation-backed bonds (Baa1)
New Jersey TTFA Federal Highway Reimbursement (GARVEE) bonds (Baa1)
New Jersey Health Care Facilities Financing Authority appropriation-backed bonds (Baa1)
New Jersey Sports and Exposition Authority appropriation-backed bonds (Baa2)
South Jersey Port Corporation bonds (Baa1)
Chapter 12 County College Bond Program (appropriation-backed) (Baa1)
NJEDA Motor Vehicle Surcharge bonds (Baa1)
Local Government State Aid Intercept Programs:
-- New Jersey Municipal Qualified Bond Program (Baa1)
-- New Jersey Qualified School Bond Program (Baa1)
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM195101 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.
The principal methodology used in the general obligation and G.O. related ratings was US States Rating Methodology published in April 2013. The principal methodology used in the appropriation and moral obligation bonds was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. The principal methodology used in rating the special tax bonds was US Public Finance Special Tax Methodology published in January 2014. The principal methodology used in the qualified enhancement program ratings was State Aid Intercept Programs and Financings: Pre and Post Default published in July 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM195101 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:
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 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
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
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