NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to the following New Jersey
Transportation Trust Fund Authority (NJTTFA) transportation system bonds:
--Approximately $540.665 million transportation system bonds, 2013
series A;
--Approximately $338.185 million transportation system bonds, 2013
series B (Federally Taxable).
The bonds are expected to sell via negotiation on April 16, 2013.
In addition, Fitch affirms the following ratings:
--Approximately $10 billion outstanding NJTTFA state
appropriation-backed obligations at 'A+'.
The Rating Outlook is Stable.
SECURITY
Debt service is paid under a state contract between the state treasurer
and the authority from certain dedicated revenue sources, subject to
annual legislative appropriation.
KEY RATING DRIVERS
APPROPRIATION OBLIGATION OF THE STATE: State contract payments provide
for debt service; payments must be appropriated annually by the state
legislature, resulting in a rating one notch below the state's 'AA-'
general obligation (GO) bond rating. The state contract for the system
bonds, pursuant to statute, specifies an appropriation of minimum
equivalent amounts from several transportation-related taxes and fees
and stipulates that the state's general fund must cure any shortfalls.
CONSTITUTIONALLY DEDICATED REVENUE SOURCES: Certain transportation
revenues are constitutionally dedicated and pledged to the
transportation trust fund account, although these monies need to be
appropriated by the legislature. Monies appropriated to the
transportation trust fund account have always been sufficient to cover
annual debt service.
LONG-TERM LIABILITIES ARE CONSIDERABLE: Above-average debt obligations
are compounded by significant and growing funding needs for the state's
unfunded pension and employee benefit liabilities. Continued pension
funding level deterioration is projected through the medium term as full
funding of the actuarially required contribution is several years off.
WEALTHY ECONOMY WITH SLOW RECOVERY: New Jersey benefits from a wealthy
populace and a broad and diverse economy. The state's economic
performance has lagged the nation in recovery from the recent recession.
The unemployment rate remains above national averages.
BUDGET REMAINS STRUCTURALLY IMBALANCED: Management has proactively
responded to past revenue weakness and growth in state spending has been
contained. Nevertheless, the inability to achieve an overly optimistic
fiscal 2013 revenue forecast now requires corrective measures and use of
fund balance to close a mid-year budget gap. Full funding of annual
pension obligations is several years off. Reserve balances are expected
to further narrow, limiting flexibility to absorb unforeseen needs.
STRONG EXECUTIVE POWERS: The governor has strong powers to implement any
necessary expenditure reductions to balance the budget and the state has
a record of doing so.
RATING SENSITIVITIES
The rating is sensitive to shifts in the state's 'AA-' GO credit rating
to which this credit is linked.
CREDIT PROFILE
The 'A+' rating on the transportation system bonds is based on annual
contract payments, subject to legislative appropriation, to be made by
the state of New Jersey. Debt service is paid under a contract with the
state treasurer, from payments to be made to the authority from the
transportation trust fund account within the state's general fund. The
payments are pledged to debt service on these bonds.
The contract for the system revenue bonds, pursuant to statute,
specifies minimum equivalent amounts from several transportation-related
taxes and fees, the vast majority of which are 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. The contract requires the state to cover any funding
shortfalls from its general fund.
The 2013 series bonds are being issued under the now-former
transportation trust fund authorization dating from 2006 to refund
outstanding bonds for debt service savings. A new transportation
reauthorization act was adopted in the 2012 legislative session,
authorizing $6.4 billion in transportation capital spending spanning
fiscal years 2013-2016. NJTTFA borrowing of almost $3.5 billion was
authorized.
NJTTFA bonds were first offered in 2012 under the new program and
associated bond resolution. Bonds issued under the new program (program
bonds) are secured by the same constitutionally dedicated transportation
revenue sources as bonds issued under the former program (system bonds)
although certain statutorily dedicated revenue sources supporting the
system bonds are not available for bonds issued under the new program,
including truck and motor vehicle registration fees and toll road
contributions. In contrast to system bonds, which benefit from a
backstop of all general fund revenues, the state's collection of sales
tax revenue is available to cure deficiencies for the program bonds.
While the sales tax represents a narrower stream of available revenue,
it remains a substantial pool of resources and the state plans to
utilize increasing amounts of this revenue to fund NJTTFA's capital
program. Sales tax collections made up about 46% of the state's $17.6
billion budget-basis general fund in fiscal 2012. Fitch rates both
system and program bonds one notch below the state's GO rating.
The new four-year capital program for transportation projects is also
supported by additional pay-as-you-go allocations from the NJTTFA as
well as the New Jersey Turnpike Authority (NJTA), although the
governor's proposed budget for fiscal 2014 allocates $324 million of
resources from the NJTA that would have been used for capital projects
to fund operations of New Jersey Transit. The state expects that
transportation capital borrowing in fiscal 2014 will not increase due to
this re-allocation of resources due to the receipt of $250 million of
bond premium and proposed shifts in project funding between federal and
state sources. The Port Authority of New York and New Jersey is also a
participant in the capital program, contributing $1.457 billion over the
four years.
The NJTTFA program bonds are expected to be issued annually beginning in
fiscal 2013 at about $1.25 billion and declining thereafter to $627
million in fiscal 2016. The program allows for up to 30% of permitted
annual bonding to be issued prior or subsequent to the designated fiscal
year, subject to certain restrictions. The enacted fiscal 2013 budget
includes an appropriation of $1.094 billion to the transportation trust
fund account for debt service expense, which was expected to total just
over $1 billion in fiscal 2013 prior to this refunding.
STATE'S GENERAL CREDIT QUALITY
New Jersey's 'AA-' GO credit rating reflects its high wealth levels and
broad economy, offset by a comparatively high debt burden and a
multitude of long-term spending pressures, including continuing capital
needs and significant unfunded pension and employee benefits
obligations. Despite passage of pension and benefits reform legislation
which will restrain future growth in the state's accumulated
liabilities, continued pension funding level deterioration is projected
through the medium term as full funding of the actuarially required
contributions is phased in over several years. This schedule also
results in sizeable, planned increases in annual pension contributions.
Fitch believes that meeting the requisite increases in pension
contributions will continue to be challenging and is likely to conflict
with other long-term demands, such as property tax relief, school
funding, and infrastructure needs.
FINANCIAL OPERATIONS HAVE BEEN CHALLENGED
New Jersey has been challenged this year in meeting an overly optimistic
revenue forecast that was adopted with the fiscal 2013 budget, which
began on July 1, 2012, as well as by Hurricane Sandy, which made
landfall on Oct. 29, 2012. The state projected robust revenue growth in
fiscal 2013 of $2.6 billion (9.1% above 2012 levels not inclusive of
fund adjustments) reflecting projected personal income tax (PIT) growth
of 5.7%, sales tax growth of 6.1%, and an expected 26% increase in
corporate tax receipts (CIT). Actual receipts through March 2013 as
compared to the state's revised revenue forecast for fiscal 2013
(expected revenues lowered by $407 million) indicate that revenues are
0.2% above the revised revenue estimate with several months remaining in
the fiscal year. Growth through March was primarily focused in the PIT
(up 1.2% year-over-year (YOY) and sales tax (up 0.5% YOY), significantly
offset by YOY declines in most other revenue categories including the
CIT (down 2.1%). The state's casino-related revenues are below the
revised forecast.
Growth in PIT receipts is thought to include the push-forward of income
into 2012 due to the uncertainty regarding federal tax law changes,
offset by modest wage depression related to the hurricane. The U.S.
Bureau of Economic Analysis (BEA) recently estimated that interruptions
in economic activity in the state caused by the storm depressed wages by
0.7%, or about $400 million in the fourth quarter of 2012. Also making
interpretation of the state's tax performance more challenging is the
apportionment of almost $4.4 billion in FEMA aid to residents and
communities in the state as of March 18, 2013. A total of $50.38 billion
has been provided by the federal government to assist states impacted by
Hurricane Sandy, primarily allocated among eight federal agencies; it is
to be determined what percentage of this aid in total New Jersey will
receive and the state is also expected to receive a boost in tax revenue
from recovery activity. Federal aid is expected to cover the vast
majority of costs related to the storm.
The governor's budget proposal for fiscal 2014 includes updated revenue
estimates for fiscal 2013 and projects a revenue shortfall in fiscal
2013 of $407 million, incorporating reduced expectations for sales tax,
CIT, and casino revenues. The proposed budget also highlights $40
million in unexpected costs to the state in regard to the hurricane in
fiscal 2013 and includes $512 million in fiscal 2013 supplemental
appropriations to provide for $222 million for increased Medicaid and
Family Care program costs, $61 million for the employee social security
tax account, $35 million for state health benefit costs, and $30 million
for snow removal, with the balance to provide for unrealized expenditure
savings, expenditure overages, and a one-time federal claim adjustment.
To address the current-year gap, the governor proposes the use of $72
million of fund balance, allowing $377 million of appropriations to
lapse, and moving the property tax rebate that is normally provided to
state taxpayers in May to August 2013; that shift would provide $392
million in budget relief to the state in fiscal 2013.
Based on the governor's proposal, the ending fund balance in fiscal 2013
is expected to total $375 million, equal to a slim 1.2% of total
appropriations, down from $447 million in fiscal 2012, and lower than
the $648 million ending balance for the year that had been anticipated
at the time of budget adoption. The reduced projected ending fund
balance partly reflects a reduction in the fiscal 2013 opening balance,
from an expected $570 million to $447 million, as an operating deficit
was recorded in fiscal 2012. Fiscal 2012 had revenue growth of $426
million (1.5%) above fiscal 2011 levels and the ending fund balance of
$447 million was a $426 million decrease from the opening year balance
of $873 million and lower than the $640 million that was anticipated
early in the fiscal year. The expected total ending fund balance for
fiscal 2013 could be reduced by $166 million in lost revenue from
ongoing litigation regarding municipal affordable housing trust fund
transfers expected to be received by the state, reducing the already
narrow margins.
FISCAL YEAR 2014 EXEC BUDGET REQUIRES EXPENDITURE RESTRAINT; MAINTAINS
MINIMAL FUND BALANCES
The governor's budget for fiscal 2014 proposes growth in appropriations
of 2.3% to $32.9 billion from the revised fiscal 2013 budget. State
education spending grows by 5.7% while Medicaid expense is budgeted to
decline by 0.6%, incorporating anticipated results from state reform
measures and the governor's proposal to participate in the federal
Medicaid expansion; the state expects to benefit from federal subsidy of
its current, expansive Medicaid program. The use of one-time measures to
balance the budget continues and is planned to total just over $1
billion, not including pension underfunding. One-time measures include a
$75 million fund balance draw (narrowing the fund balance to a
negligible $300 million or less than 1% of revenue) and expected debt
refunding for budget relief. The pension contribution is funded at
three-sevenths of the actuarially required level for fiscal 2014,
consistent with the established statutory schedule to phase in the full
contribution over seven years. This partial contribution equals almost
$1.7 billion and accounts for about 5% of the proposed budget.
Projected revenues in support of the budget total $32.8 billion and
incorporate 6.5% projected growth in the PIT, 4.7% growth in sales tax,
7% growth in the CIT, and 85% ($200 million) growth in casino revenue
resulting from the introduction of internet gaming tied to Atlantic City
casinos; the total increase projected from revised fiscal 2013 revenues
is 4.9%. Economic assumptions tied to the forecast include 1.9% growth
in employment from fiscal 2013, 5% growth in personal income, and an
8.6% unemployment rate.
Achievement of the revenue and expenditure targets contained in the
proposed fiscal 2014 budget will be challenging, requiring the
attainment of economic growth beyond current progress, fully realizing
budgeted Medicaid savings, exercising notable expenditure restraint, as
well as receiving forecast casino revenue from the implementation of
internet gaming. The use of fund balances and one-time revenue in fiscal
years 2013 and 2014 combined with the continual, although improved,
insufficient pension funding, point to the state budget's persistent
structural imbalance. Further, the narrowness of the state's fund
balance position is a concern. The governor does have strong powers to
implement expenditure reductions to balance the budget and is expected
to exercise those powers as necessary.
ECONOMIC GROWTH HAS LAGGED THE NATION
State employment growth during most of the last decade lagged the
national experience and while growth has returned following losses due
to the recession, the pace of expansion remains below the national
average. The state recorded a decline of 1.1% in non-farm employment
levels in 2010, slightly higher than the 0.7% contraction seen
nationally, growth in 2011 was relatively flat to 2010 and below the
1.1% national growth rate, and 2012 recorded a similar trend with state
growth of 1.2% compared to the nation of 1.7%. Year-over-year employment
growth as of February 2013 was 1.5%, matching the national growth for
the same period. State unemployment of 9.3% for February 2013 is above
the national level of 7.7% for the same month and largely reflects an
increase in the labor force rather than a loss of employment; the rate
is up from 9.2% one year earlier. New Jersey's wealth levels are high,
with 2011 per capita personal income of $52,430 equaling 126% of the
national level, ranking third among the states.
COMPARATIVELY HIGH LONG-TERM LIABILITIES
New Jersey's debt levels are high for a U.S. state and ongoing capital
demands for school construction and transportation projects remain
large. Net tax supported debt as of June 30, 2012 equaled 7.9% of 2011
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 has
limited growth in debt levels.
As of July 1, 2011, pension liabilities for the public employee
retirement system (PERS), reflective of pension reforms and a change in
plan assumptions, were 67.3% funded on an aggregate basis and the
teachers system was 62.8% funded. System-wide funding levels for the
PERS and teachers systems - using Fitch's more conservative 7% discount
rate assumption - are 61% and 56.9%, respectively. While pension and
employee health benefit reforms have been implemented and are expected
to slow the growth in liabilities, the state's plan to phase in full
funding of its actuarially required pension contributions over a
seven-year period will continue to weigh on funded ratios in the near
term and add stress to the state's operating budget. On a combined
basis, New Jersey's net tax-supported debt and unfunded pension
obligations attributable to the state, as adjusted for a 7% return
assumption, total 16.3% of 2011 personal income, well above the median
for states rated by Fitch.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
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
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