New York, March 02, 2022 -- Moody's Investors Service has upgraded New Jersey's general obligation and Garden State Preservation Trust, NJ bonds to A2 from A3, and the state's related subject-to-appropriation bond ratings also by one notch, to A3 from Baa1 for bonds financing essential-purpose projects and to Baa1 from Baa2 for bonds financing less-essential projects.
The essential-purpose appropriation financings include bonds issued by the New Jersey Transportation Trust Fund Authority and school construction bonds issued by the state's Economic Development Authority. Also upgraded to A3 from Baa1 was the New Jersey County College Enhancement Bond Program Chapter 12. Less-essential project financings include bonds issued by the New Jersey Sports & Exposition Authority. The Liberty State Park Project Bonds issued by the New Jersey Economic Development Authority were affirmed at Baa1.
The program ratings for the state's aid intercept enhancement programs - the New Jersey Qualified School Bond Program and the New Jersey Municipal Qualified Bond Program -were upgraded to A3 from Baa1. In addition, the rating assigned to Federal Highway Reimbursement Revenue bonds (GARVEEs) of the New Jersey Transportation Trust Fund Authority was upgraded to A3 from Baa1. The ratings on the bonds issued by the South Jersey Port Corporation were affirmed at Baa1.
The outlook on all the bonds has been revised to stable from positive. The outlooks on the enhanced financing-level ratings for schools and local governments that issue under the intercept programs match the outlooks on the programmatic ratings.
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM907586030 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 general obligation (GO) upgrade to A2 incorporates the state's continuing trends of strong revenue and liquidity and its steps to more aggressively address liability burdens, including completion of a debt-reduction program and increased pension contributions, which are consistent with improving governance and fiscal management. The rating also acknowledges that, despite the state's diverse economy and wealthy tax base, it retains retirement benefit liabilities that are among the largest of the 50 states and that will present recurring fiscal pressure and increase the state's vulnerability to financial market downturns.
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) to the trust for debt service, subject to annual appropriation. The GO-level 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. The rating is capped at the state's GO because of a 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 the majority of the state's appropriation debt and on the County College Enhancement Bond Program Chapter 12 are notched off of the state's A2 GO rating, reflecting a strong legal structure, the essential nature of the financed projects and the need for annual legislative appropriation of revenues for 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 on essential assets.
The Baa1 rating on various state appropriation obligations (including debt issued through the New Jersey Sports & Exposition Authority for racetrack, convention center and stadium projects, as well as 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 the facilities financed by this debt.
The Baa1 rating on the South Jersey Port Corporation senior- and subordinate-lien bonds is two notches below the state's A2 GO rating. The wider notching (compared with a single notch previously) is generally consistent with our approach to bonds supported by a state's moral obligation to replenish a debt service fund (DSRF). We note that the state has an approximately 35-year history of making good on its commitment, established in the corporation's enabling act and bond resolutions, to consider appropriating funds to replenish the port's debt service reserve fund (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.
The A3 programmatic ratings on the Qualified School Bond Program and the Municipal Qualified Bond Program are a notch below the state's A2 GO rating, which is consistent with 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 NJ 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 also incorporates the relatively long final maturity that spans multiple authorizations of the federal aid highway program and, similar to 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, because of the requirement that pledged revenues be appropriated by the New Jersey state legislature 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 stable outlook is based on expectations the state will maintain recently improved governance practices and continue to benefit from a more proactive liability management approach and the from the impact of both federal support and a better-than-expected revenue recovery after the pandemic-induced recession. This includes the enhanced financing-level ratings for schools and local governments that issue under the intercept programs.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
For the GO rating:
- Implementation of structurally balanced actions to close budget gaps
- Articulated strategy for sustained full funding of pension contributions
- Maintenance of budgetary balances and liquidity above historic averages
- Relatively stable debt and pension metrics, and fixed cost increases that remain affordable
For the appropriation-backed and notched debt:
- Upgrade of the state's GO rating
For the NJ TTFA GARVEE rating:
- An increase in the state's GO rating combined with an increase in coverage of maximum annual debt service
- Implementation of strong indenture limits on additional bond issuance
- Addition of structural protections to bridge a potential federal authorization gap
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
For the GO rating:
- Reduction in pension contributions to levels that fall short of previously established targets
- Failure to address any substantial structural imbalance with recurring fiscal measures
- Reduced liquidity levels or actions (such as cash-flow borrowing) taken to provide liquidity
- Substantial growth in unfunded pension liabilities or other debt that elevates fixed costs
For the appropriation-backed and notched debt:
- Downgrade of the state's GO rating
- Indications that the state's incentive to make annual appropriations has diminished
For the TTFA GARVEE rating:
- A downgrade of the state's GO rating
- Discontinuation or reduction in federal transportation grant program
- Lapse in reauthorization of federal transportation spending
- Sharp decline federal Highway Trust Fund revenue caused by economic stress or other factors
- Significant additional leverage that reduces coverage materially from historical levels
LEGAL SECURITY
New Jersey's G.O. bonds are general obligations of the state, backed by the state'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 of the corporation's operations. 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 debt service reserve fund (DSRF) to the required level.
The Qualified School Bond Program and the Municipal Qualified 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) bonds' 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 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-most populous state, based on its 2020 US Census population of almost 9.3 million. The state's economy is ninth-largest, based on current-dollar state GDP of $618.6 billion in 2020, according to the US Bureau of Economic Analysis.
METHODOLOGY
The principal methodology used in the general obligation ratings was US States and Territories published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1084466. The principal methodology used in the special tax ratings was US Public Finance Special Tax Methodology published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1260087. The principal methodology used in the appropriation, moral obligation, Garden State Preservation Trust bonds and New Jersey County College Enhancement Bond Program Chapter 12 ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments Methodology published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1298498. The principal methodology used in the intercept program ratings was State Aid Intercept Programs and Financings published in December 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1067422. The additional methodology used in Garden State Preservation Trust bond ratings was US Public Finance Special Tax Methodology published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1260087. Alternatively, please see the Rating Methodologies page on www.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 www.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_PBM907586030 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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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.
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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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.
Edward Hampton
Lead Analyst
State Ratings
Moody's Investors Service, Inc.
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Timothy Blake
Additional Contact
MSPG
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Client Service: 1 212 553 1653
Releasing Office:
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