Fitch Affirms New Jersey EDA's Cigarette Tax Rev Bonds at 'BBB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB+' rating on the New Jersey Economic Development Authority's cigarette tax revenue refunding bonds, series 2012, outstanding in the amount of approximately $938 million. The Rating Outlook is Stable.

SECURITY

The bonds are special and limited obligations of the authority, payable under a state contract between the treasurer and the authority solely from 100% of revenues from a $0.65/pack statewide cigarette tax deposited in the dedicated cigarette tax revenue fund held in the state treasury, subject to appropriation.

KEY RATING DRIVERS

CIGARETTE TAX REVENUES EXPECTED TO DECLINE: Cigarette tax collections, the sole source of bond repayment, have been declining modestly and are expected to continue to decline through the life of the bonds. Cigarette sales have been negatively affected by repeated tax rate increases on the state and federal level as well as initiatives to curtail smoking. Future legislative and regulatory changes could negatively affect collections.

SATISFACTORY DEBT SERVICE COVERAGE LEVELS: Debt service coverage is satisfactory and is expected to be maintained at adequate levels. The authority has structured a declining debt service profile to maintain solid coverage even with the expected deterioration in the pledged revenue source.

NO ADDITIONAL BORROWING PERMITTED: The indenture is closed and there is no authorization for additional bonds, protecting against further leveraging of the revenue stream.

RATING SENSITIVITIES

The rating is sensitive to shifts in consumer use of tobacco products, should such shifts result in debt service coverage on this obligation that is materially below current expectations. Use of tobacco products is affected by numerous factors including federal and state tobacco regulatory and tax policies, population growth, price increases, disposable income, smoking bans, nicotine dependence, and health warnings.

CREDIT PROFILE

The bonds are secured by deposits to the state's dedicated cigarette tax revenue fund, a separate fund in the state treasury, subject to legislative appropriation, in an amount equivalent to cigarette tax revenues generated from a statewide $0.65 per pack tax (from a total $2.70/pack tax). Before any cigarette tax revenues can flow to the fund, a prior $151 million annual statutory allocation to two state health-related funds must be met. Upon satisfaction of the prior dedication, all state-collected cigarette tax revenues are applied to the fund to bring it to the level it would have been if the prior transfer had not been made. At that point, the allocation to the fund reverts to the $0.65/pack.

The legislature may alter or amend the cigarette tax act or the application of cigarette tax revenues. The state has not pledged or covenanted that it will not take any action that could adversely affect the collection of sufficient cigarette tax revenues to fund the appropriations. The cigarette tax is collected primarily from licensed distributors who receive cigarettes directly from out-of-state manufacturers and is thus dependent upon in-state cigarette sales. Unless otherwise provided by law, every package of cigarettes must be stamped before being transferred from the original acquirer in New Jersey. This tax is not imposed on other tobacco products.

The indenture is closed and there is no authorization for additional bonds. Accordingly, there is no additional bonds test and no annual coverage requirement.

A declining trend in cigarette consumption in New Jersey has been the result of changes in state and federal tax structures, health care trends, levels of disposable income, and the imposition of a statewide indoor smoking ban, except on casino gaming floors, in 2006. New Jersey's cigarette tax rate is currently $2.70 per pack, while the federal government's tax rate is $1.01 per pack. New Jersey's cigarette tax ranks eighth highest nationally, with New York first, although New Jersey's rate is well above that of neighboring Pennsylvania and Delaware.

A consultant's report at the time of 2012 bond sale projected annual declines in New Jersey taxable cigarette sales of just over 3% annually through final maturity in fiscal 2029. Actual revenue has been modestly below that forecast, although annual declines are still projected in that range. Fiscal 2013 revenues fell 2.7% year-over-year, and the state forecasts 3% declines in each of fiscal years 2014 and 2015.

Debt service coverage based on the state's fiscal 2014 forecast is 1.85x, dropping to a projected 1.48x in fiscal 2015 with an increase in debt service in that year. Thereafter, debt service requirements decline every year and coverage remains around 1.5x, assuming declines of about 3% annually.

There are no bondholder remedies in the event of non-appropriation. Fitch recognizes that the authority provides broad capital support of state programs and accounts for a significant amount of the state's tax-supported debt.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from IHS Global Insight.

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', Aug. 14, 2012;
--'U.S. State Government Tax-Supported Rating Criteria', Aug. 14, 2012.

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822832
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Contacts

Fitch Ratings
Primary Analyst
Laura Porter, +1-212-908-0575
Managing Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Marcy Block, +1-212-908-0239
Senior Director
or
Committee Chairperson
Douglas Offerman, +1-212-908-0889
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Laura Porter, +1-212-908-0575
Managing Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Marcy Block, +1-212-908-0239
Senior Director
or
Committee Chairperson
Douglas Offerman, +1-212-908-0889
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com