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Rating Action:

Moody's revises New Jersey's outlook to positive from stable, affirms issuer and related ratings

30 Sep 2022

New York, September 30, 2022 -- Moody's Investors Service has revised the State of New Jersey's outlook to positive from stable, while affirming the state's issuer and general obligation (G.O.) bond ratings at at A2.  Instrument-level ratings were affirmed, as described below.

Debt issued for the Garden State Preservation Trust, NJ, was affirmed at A2, and appropriation debt for more essential projects was affirmed at A3, while the ratings assigned to bonds issued for less-essential projects were affirmed at Baa1. Essential-purpose financings encompass bonds issued by the New Jersey Transportation Trust Fund Authority (TTFA), school construction bonds issued by the New Jersey Economic Development Authority (EDA) and bonds issued by various other state authorities, including the New Jersey Educational Facilities Authority, the New Jersey Building Authority and the New Jersey Health Care Facilities Financing Authority. Less-essential project financings include debt of the New Jersey Sports & Exposition Authority and Liberty State Park Project bonds issued by the EDA.

In addition, the rating assigned to Federal Highway Reimbursement Revenue Notes (GARVEEs) of the New Jersey Transportation Trust Fund Authority was affirmed at A3. The South Jersey Port Corporation's bonds, supported by a state moral obligation, were affirmed at Baa1.

The pledge specific rating assigned to the New Jersey County College Enhancement Bond Program Chapter 12 was affirmed at A3. Program pledge specific ratings for the state's aid intercept enhancement systems -- the New Jersey Qualified School Bond Program and the New Jersey Municipal Qualified Bond Program -- were affirmed A3.

Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM907837242 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

New Jersey's A2 issuer rating incorporates the state's accumulation of healthy fund balances and strong tax collections that have accommodated full pension payments and retirement of some debt. The state's improved reserves position it to better withstand potentially less favorable economic and revenue trends in the year ahead. The rating continues to reflect long-term liability and fixed cost burdens that are much higher than those of most states. The rating on the state's general obligation bonds is equivalent to the issuer rating because of the broad full faith and credit pledge on the bonds.

The A2 rating on the Garden State Preservation Trust bonds is based on the state's contractual obligation to transfer a constitutionally dedicated portion of the statewide sales tax (the first $98 million, enough to cover debt service) to the trust for debt service, subject to annual appropriation. The rating is supported by a strong legal structure that restricts use of

the allocated funds to debt service and by the ample coverage of the allocated amount by the sales tax. However, the rating is capped at the state's issuer rating because of the lack of

structural and mechanical separation of the dedicated revenue from the state's General Fund and the technical need for annual appropriation.

The A3 ratings on most of the state's appropriation debt (and on the pledge specific rating on the County College Enhancement Bond Program Chapter 12) are notched off the State of New Jersey's A2 issuer rating, reflecting the contingent nature of the debt (requiring annual legislative appropriation) as well as other features, including the essential nature of the financed projects. Payment on 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 on essential assets. The lower rating (Baa1) on some state appropriation obligations - including debt issued through the New Jersey Sports & Exposition Authority for racetrack, convention center and stadium projects and debt issued by the New Jersey Economic Development Authority for the Liberty State Park Project - is consistent with the appropriation risk and the lower essentiality of facilities financed by this debt.

The Baa1 ratings on the South Jersey Port Corporation senior-lien and subordinate-lien bonds are also notched off the state's issuer rating. The two-notch distinction is generally consistent with our approach to bonds supported by a state's moral obligation to replenish a debt service fund (DSRF). The state has a long history of making good on a commitment, established in the corporation's enabling act and bond resolutions, to consider appropriating funds to replenish the port's DSRF to match maximum annual debt service. State

appropriations deposited into the subordinate-lien DSRF cannot be transferred to the senior lien DSRF. Nothing requires the legislature to appropriate proportionately to the two liens' DSRFs, but the risk of inequivalent appropriations does not warrant a full notch rating distinction between the liens.

The A3 programmatic pledge specific ratings on the Qualified School Bond Program and the Municipal Qualified Bond Program also are notched off the state's issuer rating. The one-notch distinction reflects the programs' strong position in the state's hierarchy of debt and spending priorities and strong program mechanics, including the direct payment of aid to the trustee for debt service.

The A3 rating on the New Jersey TTFA Federal Highway Reimbursement Revenue Notes (GARVEEs) incorporates the appropriation requirement for pledged revenues, satisfactory coverage by pledged federal highway aid, a strong 3x additional bonds test and a requirement that pledged revenues first fulfill all annual debt service requirements, once appropriated. The rating further incorporates the relatively long final maturity that spans multiple authorizations of the federal aid highway program and, like most GARVEE programs, the lack of structural protection against disruption in federal highway aid, such as a debt service reserve fund. The TTFA's GARVEEs are capped at the same level as the state's other appropriation debt, due to the requirement that pledged revenue be appropriated to pay debt service, together with the lack of legal constraints on the use of federal reimbursements. Certain characteristics of the GARVEE credit and structure, including the motivation to maintain the existing federal reimbursement funding and spending cycle, provide the state with a strong incentive to appropriate.

RATING OUTLOOK

The positive outlook is supported by the likelihood the state will continue its current practices for managing reserves and long-term liabilities, which could support improvement in the rating.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

For the issuer and G.O. ratings:

- Demonstrated or binding commitment to maintain pension contributions at actuarially indicated levels

- Implementation of structurally balanced budgets through economic cycles

- Maintenance of budgetary balances and liquidity above historic averages

- Reduction in leverage metrics to levels more closely aligned with other states

For the contingent debt, Garden State Preservation Trust bonds and state aid intercept enhancement program ratings:

- Upgrade of the state's issuer rating

For the TTFA GARVEE rating:

- An increase in the state's issuer rating combined with improved coverage of maximum annual debt service

- Stronger indenture limits on additional bond issuance

- Addition of structural protections to bridge a potential federal authorization delay

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

For the issuer and G.O. ratings:

- Reduction in pension contributions to levels that fall short of actuarially indicated amounts

- Fixed costs increasing as a share of revenue, reflecting growth in retirement benefit liabilities

- Failure to address substantial structural imbalances with recurring fiscal measures

- Significant reductions in liquidity

For the contingent debt, Garden State Preservation Trust bonds and state aid intercept enhancement program ratings:

- Downgrade of the state's issuer rating

- Indications of reduced willingness to enact annual appropriations for debt service

For the TTFA GARVEE rating:

- Downgrade of the state's issuer rating

- Discontinuation or reduction in federal transportation grant program

- Lapse in reauthorization of federal transportation spending

- Sharp decline in federal Highway Trust Fund revenue caused by economic stress or other factors

- Significant additional leverage that reduces coverage materially from established levels

LEGAL SECURITY

The G.O. bonds are general obligations backed by New Jersey's full faith and credit. The Garden State Preservation Trust bonds are supported by the state's contractual obligation to transfer a constitutionally dedicated portion of the statewide sales tax (the first $98 million) to the trust for debt service, subject to annual appropriation.

The various appropriation-backed bonds, including the Chapter 12 intercept bonds, are payable from anticipated state payments made under a contract, lease or funding agreement, subject to annual legislative appropriation. The state's payment obligations are absolute and unconditional, once appropriations have been made.

The South Jersey Port Corporation senior- and subordinate-lien bonds are supported in the first instance by senior and subordinate liens, respectively, on net revenues from the corporation. All senior and subordinate bonds are additionally backed by (and primarily paid from) the state's commitment to annually appropriate amounts sufficient to restore the DSRF to the required level.

The Qualified School Bond Program and the Municipal Qualified Bond Program intercept programs provide credit enhancement to participating schools and municipalities through the diversion of state aid revenues directly to a trustee to ensure timely debt service payments, and thereby prevent debt service obligations from competing with other local expenditure priorities.

The TTFA's Federal Highway Reimbursement Revenue (or GARVEE) notes' source of pledged revenues is Federal Title 23 funding received by the state under the Federal Aid Highway Program, subject to state legislative appropriation. The US Highway Trust Fund (HTF) receives revenues from national excise taxes on gasoline and other vehicle taxes established under periodic reauthorization by Congress. HTF funds are used to reimburse states for eligible road and transportation capital project costs according to formulas that take into account population and other factors.

USE OF PROCEEDS

Not applicable

PROFILE

New Jersey is the 11th-largest state by population in the United States, with an estimated 9.27 million residents in 2021. Its economy ranks ninth based on its $672 billion GDP (2021 current dollars).

The New Jersey Transportation Trust Fund Authority (TTFA) is an entity created under state law, and its members consist of the Commissioner of the New Jersey Department of Transportation, the Treasurer of the State of New Jersey, and five public members appointed by the Governor. Appointments of three of the members require the advice and consent of the state Senate, and two are recommended by legislative officials (the President of the State Senate in one case and the General Assembly Speaker in the other).

The South Jersey 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. The corporation is authorized to acquire, construct and operate marine terminals along the Delaware River in Mercer, Burlington, Camden, Gloucester, Salem, Cumberland and Cape May Counties. The port corporation has statutory authority to issue bonds backed by the net revenues of its operations and state appropriations replenishing its debt service reserve fund.

The state's other issuers, including the New Jersey Economic Development Authority, the New Jersey Building  Authority, the New Jersey Educational Facilities Authority, and New Jersey Health Care Facilities Financing Authority, are conduit financing entities created under state law as political subdivisions of the state.

METHODOLOGY

The principal methodology used in general obligation, appropriation, moral obligation, and New Jersey County College Enhancement Bond Program Chapter 12 ratings was US States and Territories Methodology published in March 2022 and available at https://ratings.moodys.com/api/rmc-documents/356901. The principal methodology used in special tax ratings was US Public Finance Special Tax Methodology published in January 2021 and available at https://ratings.moodys.com/api/rmc-documents/70024. The principal methodology used in the intercept pledge specific ratings was State Aid Intercept Programs and Financings Methodology published in March 2022 and available at https://ratings.moodys.com/api/rmc-documents/356903. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are all solicited credit ratings. For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings.  Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM907837242  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:

- Rating Solicitation

- Issuer Participation

- Participation: Access to Management

- Participation: Access to Internal Documents

- Endorsement

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.moodys.com.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Edward Hampton
Lead Analyst
State Ratings
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Timothy Blake
MANAGING DIRECTOR
State Ratings
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.
© 2023 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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