NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following New Jersey Transportation Trust Fund Authority's (TTFA) transportation system revenue bonds:
--$600 million 2011 series A.
Fitch also affirms the 'AA' rating on the state of New Jersey's outstanding general obligation (GO) bonds and the 'AA-' rating on the state's appropriation-backed debt, which is detailed at the end of this release.
The Rating Outlook for New Jersey GO and appropriation-backed debt, including the TTFA bonds, is revised to Negative from Stable.
The TTFA bonds are scheduled to sell through negotiation the week of May 2, 2011.
RATING RATIONALE:
--The Outlook revision to Negative from Stable reflects Fitch's elevated concern regarding the mounting budgetary pressure presented by the state's significant and growing unfunded pension liabilities, particularly in the context of an already high debt burden, a structurally imbalanced budget, and the recent court challenge to local K-12 school district funding. With full funding of the state's annually required contributions to its pension systems to be phased in incrementally over a seven year period, continued funding level deterioration is projected through the medium term, and the resulting increases in annual funding requirements are likely to conflict with other budget priorities, such as property tax relief and increased infrastructure investments. Fitch will continue to monitor developments related to the school funding case and legislative action on proposed pension and employee benefit reforms.
--The state's 'AA' GO bond rating reflects high wealth levels and a broad and diverse economy. These strengths are offset by a high debt burden, significant unfunded pension and employee benefits obligations, limited financial flexibility, and a multitude of spending pressures.
--The 'AA-' rating on the authority's transportation system bonds, one notch below the state GO rating, reflects the fact that debt service is met through state contract payments which are subject to annual legislative appropriation. The state contract, pursuant to statute, specifies minimum equivalent amounts from several transportation-related taxes and fees and stipulates that the state's general fund cure any shortfalls.
--Certain transportation revenues are constitutionally dedicated and pledged to the Transportation Trust Fund Account, though constitutionally dedicated monies still need to be appropriated by the legislature. Monies appropriated to the Transportation Trust Fund Account have always been sufficient to cover annual debt service.
--A revised transportation funding plan has been proposed which incorporates new funding from the New Jersey Turnpike Authority and the Port Authority of New York and New Jersey, as well as increased revenue diversions from the State's General Fund. The bonds being issued utilize unused bonding capacity related to the existing transportation trust fund authorization.
WHAT COULD LEAD TO A DOWNGRADE?
---With respect to the state's GO rating, failure to implement pension and employee health benefit reform that meaningfully impacts the state's strained budgetary position and contains the growth of the significant long term liabilities. Failure to address in a timely fashion funding requirements following an adverse decision in the school funding case.
--With respect to the TTFA transportation system revenue bonds, change in the state's GO rating, on which this rating is based.
SECURITY:
The transportation system bonds are secured by payments made subject to legislative appropriation to the authority pursuant to a state contract among the authority, State Treasurer, and Commissioner of the state's Department of Transportation.
CREDIT SUMMARY:
The state's 'AA' GO bond rating reflects high wealth levels and a broad and diverse economy. These economic strengths are offset by a high debt burden and a multitude of spending pressures, including continuing capital needs, as well as significant unfunded pension and employee benefits obligations. Fitch will continue to monitor the effects of long-term obligations on New Jersey's operating environment, particularly given that the elimination of pension funding has been a significant part of budget balancing measures in recent years. Pension and health benefit reform legislation designed to address unfunded accrued liabilities and limit future expenditure growth in these areas are currently being negotiated, and Fitch will evaluate legislative action on this front. Failure to implement reforms that produces meaningful impact on the state's strained budgetary position and contains the growth of the significant long term liabilities will pressure the rating. Failure to address in a timely fashion funding requirements associated with an adverse decision in the school funding case could also pressure the rating.
The enacted fiscal 2010 budget was approximately $3.9 billion below the originally adopted fiscal 2009 budget and addressed an $8.2 billion current-level funding gap. A combination of revenue enhancements, federal stimulus monies, restrained growth and spending reductions were employed to close the gap, though reductions in pension funding and savings generated by restructured debt repayment accounted for a significant portion of the identified cuts. The majority of the proposed revenue enhancements resulted from new personal income tax bracketing affecting the state's highest earners which were scheduled to be in effect for just one year. Other measures reduced property tax relief efforts, an area of pressure for the state. Revenue underperformance and supplemental spending needs over the course of the year opened a $2.35 billion gap. A mix of spending reductions and balance draws totaling just over $2 billion, inclusive of $461 million in mid-year school aid funding reductions, and approximately $280 million in new revenue and off-budget resources were employed to maintain balance. Audited results indicate the state closed fiscal 2010 with an ending balance of approximately $804 million, due in part to actual revenue performance that was stronger than the downwardly revised estimates and expenditures coming in below budget.
The adopted budget for fiscal 2011, which began on July 1, addressed a $10.9 billion current-law funding gap without broad based tax increases and with significant spending reductions, though a large portion of the gap was closed by forgoing the state's $3 billion pension contributions which will exacerbate future budgets and stress already weak funding levels. The budget assumed overall revenue growth of 1.5%, while budgeted appropriations across all funds declined by 1.7%. Personal income tax revenues were projected to decline by 3.8%, reflecting in part the sunset of the temporary tax increases, while sales tax and corporate income tax revenues were expected to grow by 4.9% and 7.3% respectively. Revenue expectations for fiscal 2011 were revised upward in February by $100 million, primarily due to stronger personal and corporate income tax performance. Net of proposed supplemental appropriations (including advancing the fiscal 2012 partial pension payment into the current year) and lapses, the state projects an ending balance of $349 million, providing limited financial flexibility representing just over 1% of fiscal 2011 revenues. Through March 2011, fiscal 2011 revenues were 0.7% ($129 million) above the revised projections.
The proposed fiscal 2012 budget was approached without an initial funding gap estimate as had been done in prior years. Proposed spending, reflecting supplemental appropriations for fiscal 2011 and apportionment to fiscal 2012 of the scheduled fiscal 2012 pension contribution which may be made before the close of fiscal 2011, grows by less than 1%. While spending across most departments is reduced, local education aid grows by $250 million and increased funds for property tax relief and pay-go transportation capital funding are budgeted. Projected revenue growth of $1.1 billion (3.9% above revised 2011 levels) and an increase in the prior year surplus expectation provide an offset to the loss of federal stimulus support ($874 million for fiscal 2011) and revenue forgone due to $200 million in proposed tax relief. The use of one-time measures, inclusive of balance draws and expected debt restructuring, is down from the prior year, though this figure does not reflect the fact that only one-seventh of the state's annually required $3.5 billion payment to the pensions system is being made (potentially early in fiscal 2011). The budget anticipates savings from proposed employee benefit reforms and Medicaid waivers, both of which may not fully materialize. While it is encouraging that the state has been holding down spending growth, structural balance has not been achieved and the continued deferral of funding for the state's significant long-term liabilities will negatively impact pension funded ratios and pressure future budgets.
State employment growth during most of the last decade lagged the national experience. New Jersey non-farm employment levels declined by 0.7% in 2008 and by 3.9% in 2009, levels consistent with national declines, though the 2010 decline of 1% was slightly higher than the 0.8% contraction seen nationally. New Jersey employment appears to have bottomed, with March 2011 employment flat to March 2010 levels, compared to a U.S. gain of 1% for the same period. State unemployment of 9.3% for March 2011 is slightly ahead of the national level of 8.8% for the same month. New Jersey's wealth levels are high, with 2010 per capita personal income of $50,781 equaling 125% of the national level, ranking third among the states. Personal income growth in 2008 totaled only 68% of the national level, and the 2009 decline was sharper than that experienced nationally. For 2010, the state's personal income growth of 2.6% lagged the 3% growth experienced nationwide.
New Jersey's debt levels are high and ongoing capital demands for school construction and transportation projects remain large. The debt burden as of June 30, 2010 equaled 7.9% of 2010 personal income. Excluding bonds issued for pension funding, outstanding debt as of June 30, 2010 totaled 7.3% of 2010 personal income. State residents approved in November 2008 a constitutional amendment that requires voter approval for future debt authorizations that do not carry a dedicated repayment source, which Fitch believes may limit future growth in debt levels. As of June 30, 2010, the state's portion of pension liabilities were 56% funded on an aggregate basis, down from 62% one year prior. System-wide funding levels for the PERS and TPAF systems, using Fitch's more conservative 7% discount rate assumption (see Fitch's report dated Feb. 17, 2011, 'Enhancing the Analysis of U.S. State and Local Government Pension Obligations' available on Fitch's website at 'www.fitchratings.com'), are weak at 54.5% and 50.7%, respectively. While pension and employee health benefit reforms are currently being negotiated, the state's plan to phase in full funding of its annually required pension contributions over a seven-year period in will likely stress funding levels in the near term and has the potential to add stress to the state's operating budget.
The 'AA-' rating on the transportation system bonds is based solely on annual contract payments, subject to legislative appropriation, to be made by the state of New Jersey. Authority debt service is paid under a state contract with the treasurer of the state, from payments to be made to the authority from the transportation trust fund account within the state's general fund. The payments are pledged first to debt service. The contract, pursuant to statute, specifies minimum equivalent amounts from several transportation-related taxes and fees, the vast majority of which are now constitutionally dedicated to transportation and may not be used or borrowed for any other purposes. The taxes and fees themselves are not pledged as security. Should a shortfall occur, the contract requires the necessary funds to be raised from the state's general fund. Fitch notes subsidies generated through the federal Building America Bond program constitute pledged revenues and are pledged as security to the bonds.
Reauthorization legislation passed in March 2006 resulted in $90 million in additional dedicated revenues and authorized 31-year maturities, the use of delayed principal amortization, and capital appreciation bonds. These changes, along with a fourth debt restructuring, provided capacity for a five-year capital program for new projects for fiscal years 2007 through 2011 supported by $1.6 billion in new issuance annually. This leveraging was expected to result in all of the historically dedicated $895 million in annual revenues being consumed by debt service obligations by 2012 assuming issuance of the full five-year program, though near complete leveraging of the historically dedicated $895 million in appropriated revenues was experienced earlier than initially expected with the series of bonds issued last fall. The proposed fiscal 2012 budget includes an appropriation of $1.035 billion, with the increase resulting primarily from appropriations beyond the floor amounts from the constitutionally dedicated sources. A new reauthorization proposal has been announced, with proposed transportation spending of $8 billion spanning fiscal years 2012-2016. The plan envisions $4.4 billion in TTFA debt, though projected fiscal 2012 issuance would be covered by the $1.64 billion in authorization carried forward from the last TTFA authorization. The plan does not include a gas tax hike, though pay as you go funding is enhanced through diverting current revenue sources from the state's general fund. The plan relies on the Port Authority of New York & New Jersey for approximately 23% of the plan and also envisions greater support for statewide projects from the New Jersey Turnpike Authority, to be funded from monies no longer needed for the cancelled ARC Tunnel project.
As noted above, Fitch affirms the 'AA-' ratings and revises the Rating Outlook to Negative from Stable on the state appropriation-backed debt through issued through the following authorities:
New Jersey Transportation Trust Fund Authority
New Jersey Economic Development Authority
New Jersey Health Care Facilities Financing Authority
New Jersey Educational Facilities Authority
New Jersey Sports and Exposition Authority
Additionally, Fitch affirms the following 'AA-' ratings and revises the Rating Outlook to Negative from Stable on the following:
State of New Jersey Certificates of Participation
The Program rating assigned to bonds issued under the NJ Municipal Qualified Bond Act
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 16, 2010;
--'U.S. State Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564546
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