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And Back To Munis, As Fitch Downgrades New Jersey GO From AA To AA-

Tyler Durden's picture





 

In all the excitement over the recently uber-broken market, some may have forgotten America has a muni problem. Here is Fitch with a reminder, as it downgrades New Jersey general obligations from AA to AA-, and continues: "The downgrade of New Jersey's GO bond rating to 'AA-' from 'AA' reflects the mounting budgetary pressure presented by significant and growing funding needs for the state's unfunded pension and employee benefit liabilities, particularly in the context of a weak economic recovery, a high debt burden, limited financial flexibility, and persistent structural imbalance."

Full release:

FITCH DOWNGRADES NEW JERSEY'S GOS TO 'AA-'; OUTLOOK REVISED TO STABLE
 
Fitch Ratings-New York-17 August 2011: Fitch Ratings downgrades the State of New Jersey's outstanding general obligation (GO) bonds to 'AA-' from 'AA'.
 
Fitch also downgrades to 'AA-' from 'AA' the rating on the Garden State Preservation Trust's open space revenue bonds.
 
Additionally, Fitch downgrades to 'A+' from 'AA-' the ratings on the state's appropriation-backed debt and other related debt, which is detailed at the end of this release.
 
The Rating Outlook for all affected bonds is revised to Stable from Negative.
 
KEY RATING DRIVERS
 
--The downgrade of the state's GO rating to 'AA-' from 'AA' reflects the mounting budgetary pressure presented by significant and growing funding needs for the state's unfunded pension and employee benefit liabilities, particularly in the context of a weak economic recovery, a high debt burden, limited financial flexibility, and persistent structural imbalance.
 
--Despite recent, significant action to contain future growth in the state's accumulated pension liability, continued funding level deterioration is projected through the medium term as full funding of the actuarially required contributions is phased in, resulting in sizeable increases in annually required contributions.  Fitch believes that meeting the requisite increases in pension contributions will be challenging and is likely to conflict with other long term challenges, such as property tax relief, school funding, and infrastructure needs.
 
--Management has proactively responded to past revenue weakness, and growth in state spending has been contained.  Nevertheless, the state's budget remains structurally imbalanced inclusive of unfunded pension contributions.  Reserve balances are expected to remain narrow, offering limited flexibility to absorb unforeseen needs.
 
--New Jersey benefits from a wealthy populace and a broad and diverse economy.
The state's recent economic performance has been weak and the state is expected to lag the nation in recovering from the recent recession.
 
--New Jersey's debt position remains high, and the state's long term pension and employee benefits obligations are very significant.
 
SECURITY
 
The bonds represent general obligations of the state, with faith and credit pledged.
 
CREDIT PROFILE

The downgrade of New Jersey's GO bond rating to 'AA-' from 'AA' reflects the mounting budgetary pressure presented by significant and growing funding needs for the state's unfunded pension and employee benefit liabilities, particularly in the context of a weak economic recovery, a high debt burden, limited financial flexibility, and persistent structural imbalance.  The credit rating, at the current level reflects its high wealth levels and broad economy, 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. Despite the recent 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 several years off, resulting in sizeable increases in annually required contributions.  Fitch believes that meeting the requisite increases in pension contributions will be challenging and is likely to conflict with other long term challenges, such as property tax relief, school funding, and infrastructure needs.
 
The fiscal 2011 budget as adopted last year 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 $3.1 billion pension contributions, a source of budget relief the state has repeatedly relied on in recent years. The budget assumed overall revenue growth of 1.5%, despite the sunset of a temporary personal income tax increase, while appropriations across all funds declined by 1.7%.  Revenue expectations for fiscal 2011 were revised upward in February and again in May, primarily due to stronger personal income tax performance. Net of proposed supplemental appropriations, prepayment of fiscal 2012 school construction fund debt service, and lapses, the state projects an ending balance of $696 million, providing limited financial flexibility representing just over 2% of fiscal 2011 revenues.
 
Budgeted appropriations for fiscal 2012 are 1.2% above the estimated fiscal 2011 level, though this percentage will increase slightly once a supplemental appropriation for local aid is passed.  While spending across most departments is reduced, local education aid grows by $832 million, inclusive of additional court mandated funding for certain urban districts, and increased funds for property tax relief and pay-go transportation capital funding are incorporated.
Projected revenue growth of $1.1 billion (4% above revised 2011 levels) and an increase in the prior year surplus expectation provide an offset to the loss of federal stimulus support ($879 million for fiscal 2011) and revenue forgone due to $185 million in 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 excludes the statutorily reduced pension contribution appropriated at only one-seventh of the actuarially required contribution for fiscal 2012.  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. The state's financial cushion at year end is expected to remain narrow at approximately $640 million.
 
State employment growth during most of the last decade lagged the national experience and remains weak. New Jersey's 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's employment remains weak, with June 2011 employment was 0.4% below June 2010 levels, comparing negatively to a U.S. gain of 0.9% for the same period. State unemployment of 9.5% for June 2011 is above the national level of 9.2% 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, 2011 equaled 8% of 2010 personal income. Excluding bonds issued for pension funding, outstanding debt as of June 30, 2011 totaled 7.5% 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 limits growth in debt levels. As of June 30, 2010, the state's portion of pension liabilities, adjusted to reflect recent pension reforms, was 65% funded on an aggregate basis, an improvement from 56% before the reforms were implemented. System-wide funding levels for the PERS and TPAF systems, using Fitch's more conservative 7% discount rate assumption are weak at 61% and 59%, 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 annually required pension contributions over a seven-year period in will likely reduce funding levels in the near term and add stress to the state's operating budget.
 
As noted above, Fitch downgrades the ratings to 'A+' from 'AA-' and revised the Outlook to Stable from Negative on 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
 
New Jersey Building Authority
 
Additionally, Fitch downgrades the following ratings to 'A+' from 'AA-' and revises the Rating Outlook to Stable from Negative on the following:
 
State of New Jersey certificates of participation.
 
The program ratings assigned to New Jersey Municipal Qualified Bonds and bonds secured by the New Jersey School Bond Reserve (New Jersey School Credit Enhancement Program).

 


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Wed, 08/17/2011 - 16:08 | Link to Comment WineSorbet
WineSorbet's picture

Seems like the PPT was back in effect today.  I thought that ended?

Wed, 08/17/2011 - 16:18 | Link to Comment Sudden Debt
Sudden Debt's picture

Beter enjoy an take a picture of it because you're grandchildren will still be paying for it...

 

Wed, 08/17/2011 - 16:08 | Link to Comment Dr. Engali
Dr. Engali's picture

Merideth who?

Wed, 08/17/2011 - 16:31 | Link to Comment JW n FL
JW n FL's picture

She is a lessor God.. you should be so lucky as to know her.

 

Meredith Whitney - Wikipedia, the free encyclopedia

en.wikipedia.org/wiki/Meredith_Whitney - CachedSimilar

Meredith Ann Whitney (born November 20, 1969) is a banking analyst and frequent contributor to CNBC, Fox Business, and Bloomberg News programs. ...

Education and career - Rise to fame - Recognition - Personal life

?


  • Meredith Whitney


    www.meredithwhitneyllc.com/
  • Wed, 08/17/2011 - 16:24 | Link to Comment hambone
    hambone's picture

    I haven't seen a day where the 10yr T has gone down and remained down like today...it almost always recovers after the Equity sell off abates!?!  Not today...just sitting there at 2.16%...very bad omen???  Yields still falling in AH's...I feel like I'm turning Japanese???  Last time T rates were this low, S&P was sitting about 700.

    With T yields like this (now 2.158%) and 30yr mortgages heading for 4% interest rates...how could BB justify the need for balance sheet expansion for more QE???  Or will BB move to the MUB world and start the propping there???

    Wed, 08/17/2011 - 16:11 | Link to Comment hugovanderbubble
    hugovanderbubble's picture

    Short MUB US EQUITY

    Wed, 08/17/2011 - 16:24 | Link to Comment I am a Man I am...
    I am a Man I am Forty's picture

    this is a terrible trade, everyone know NJ, CA, and IL have issues, this is old news, if you would have shorted mub when everyone was muni fear mongering you would have gotten your ass kicked

    Wed, 08/17/2011 - 16:33 | Link to Comment hugovanderbubble
    hugovanderbubble's picture

    Haircuts has to be applied to Munibonds so ALL munibonds gonna worth less yes or yes sir.

     

    Its not just a problem of SOVEREIGN BONDS across countries, ------the next crisis = SUBGOVERNMENT FIX INCOME

    For example in SPAIN all the subgovernment bonds.---- SPANISH COMUNIDADES AUTONOMAS ARE IN DEFAULT----
    ALL

    Specially Catalonia, Valenciana,Andalucia ---- Impossible to repay their debt till XXX Century.

    Wed, 08/17/2011 - 16:12 | Link to Comment Dick Darlington
    Dick Darlington's picture

    AA-, really? Same old shit from same old raters.

    Wed, 08/17/2011 - 16:28 | Link to Comment A Nanny Moose
    A Nanny Moose's picture

    Expropriation at gunpoint is the best racket going.

    Wed, 08/17/2011 - 16:29 | Link to Comment JW n FL
    JW n FL's picture

    it really is more like a AA-(+++) if you know what I mean? wink wink, nudge nudge and dont forget the bird dog fees! never mind the New York DA and his bullshit about kick backs.. he's just a cock blocker.. Oops! never mind he is gone now and the other guy is sooooooooooooooooo a team player! YAYYYYYYY!

    Wed, 08/17/2011 - 16:13 | Link to Comment SMG
    SMG's picture

    There is a lot of disruptive news today.  Seems like somethings about to really let loose.

    Wed, 08/17/2011 - 16:14 | Link to Comment Popo
    Popo's picture

    IF NJ was a company, it's debt would be C.   The special consideration for government entities is absurd.   There is simply no possible way New Jersey can meet its pension obligations.   Why is the benefit of the doubt being given to them?

    Wed, 08/17/2011 - 16:25 | Link to Comment jm
    jm's picture

    You are missing the point.  Pensions and services can and will be cut, dissolved, whatever.  Just operating expenses to reduce in line with revenue. 

    Creditors always take precedence, and ultimately this precedence isn't of a legal nature.  If any party screws a creditor, they won't get credit again without losing some blood. 

     

    Wed, 08/17/2011 - 16:33 | Link to Comment ZackAttack
    ZackAttack's picture

    One big difference is - and I don't know about NJ or these bonds specifically - state constitutions often require that the bonds be paid by tax increases if necessary.

    Wed, 08/17/2011 - 16:17 | Link to Comment Sudden Debt
    Sudden Debt's picture

    So New Jersey is totally broke....

    99% of the population are South American unemployed "citizens" who all lost their greencard because the dog ate it....

    AND THEY STILL HAVE A'S IN THEIR RATING?!!

    Wed, 08/17/2011 - 16:27 | Link to Comment hugovanderbubble
    hugovanderbubble's picture

    Fitch downgrades 21 bonds in 12 US CMBS transactions

    Fitch the same that says US is AAA=? lol

    Wed, 08/17/2011 - 16:19 | Link to Comment zorba THE GREEK
    zorba THE GREEK's picture

    Considering the downgrade, I may delay my plans to build luxury condos in Camden. 

    Wed, 08/17/2011 - 16:56 | Link to Comment Freewheelin Franklin
    Freewheelin Franklin's picture

    Yes, but you might want to consider invewsting in the Revel Casino.

    Wed, 08/17/2011 - 17:06 | Link to Comment Freewheelin Franklin
    Freewheelin Franklin's picture

    There's also some land at the site of the former Pennsauken Mart that George Norcross III (King George III) is looking to unload that would be perfect for some condos. State Senate President Steve Sweeney will be happy to send his Iron Workers over there to "negotiate" a contract.

    Wed, 08/17/2011 - 16:23 | Link to Comment Seasmoke
    Seasmoke's picture

    fuck you NJSP ! retire at 45 and take another public job for 20 more years while thinking the NJ taxpayer is going to keep paying your pension while paying lifetime benefits for you family (and girlfriends family).......PIGS has taken on a whole new meaning

    Wed, 08/17/2011 - 16:24 | Link to Comment gunsmoke011
    gunsmoke011's picture

    WOW -- New jersey must really be sucking to be downgraded by fitch after they just yesterday re affirmed the U.S. AAA rating saying ALL WAS WELL!

    Wed, 08/17/2011 - 16:24 | Link to Comment drswhaley
    drswhaley's picture

    Chris Christie for Prez in 2012!!!!!!!!!!!!!!!!!!!!!

    Wed, 08/17/2011 - 16:31 | Link to Comment dick cheneys ghost
    dick cheneys ghost's picture

    Has he been to the Bilderberg Meetings yet?.............

    Wed, 08/17/2011 - 16:25 | Link to Comment JW n FL
    JW n FL's picture

    Meredith Whitney is not sooo hawt but I would take one for the team.. she is kool enough that we all owe her one on the house.

    http://www.google.com/search?q=meredith+whitney&hl=en&client=ob&biw=1920&bih=997&site=webhp&prmd=ivnsol&source=lnms&tbm=isch&ei=6iNMToXRFITogQeawKRz&sa=X&oi=mode_link&ct=mode&cd=2&sqi=2&ved=0CBQQ_AUoAQ

    LOL!

    Wed, 08/17/2011 - 16:39 | Link to Comment zorba THE GREEK
    zorba THE GREEK's picture

    @JW  Zorba would not kick Meredith from bed either, but Zorba's wife would.

    Wed, 08/17/2011 - 17:13 | Link to Comment JW n FL
    JW n FL's picture

    half is a LOT! 50% is a LOT!! and then the 50% of income you have left.. half of that too! so it is really more like 75%.. unless you can get an irrevocable trust back dated, dont try it! then she gets is all and you go to jail too!

    Wed, 08/17/2011 - 16:30 | Link to Comment Cdad
    Cdad's picture

    OT:

    Where the heck is ANY coverage of S&P's downgrade on the US economy [you know, beyond ZH]?  Seriously, are we saving that as some sort of "surprise" for the algo's tomorrow?  Are the fellow who backed the downgrade now being carted to prison by the jack booted thugs of President Zero?

    This is most peculiar.

    Wed, 08/17/2011 - 16:32 | Link to Comment JW n FL
    JW n FL's picture

    Ulta Top Secret(s) of the Untied States!

    U.S. Down Grade is #1..

    followed closely by??? Ron Paul's Polling Numbers!

    LULZ!

    Wed, 08/17/2011 - 16:42 | Link to Comment lizzy36
    lizzy36's picture

    Well they should be contributing about $3.5b a year to pension fund. Christie is doing about 22% of that at $750m.

    This is all going to end so well.

    Wed, 08/17/2011 - 17:11 | Link to Comment docj
    docj's picture

    Who was the last governor to contribute anything close to 100%? Serious, just asking, I honestly don't know.

    My guess though is you probably have to go back to Kean, if not further back than that.

    Wed, 08/17/2011 - 16:43 | Link to Comment Surly Bear
    Surly Bear's picture

    I am not sure I agree with Fitch's assessment because in pension accounting a company would setup a liability account for the shortfall, and an offsetting intangible asset which reflects the 'goodwill' of the employees which, in theory, reflects the 'value' of their work. With all that goodwill floating to the surface shouldn't they have received an upgrade?

    For those unfamiliar with pension accounting, yes, I am being sarcastic.

    ~S. Bear

    Wed, 08/17/2011 - 17:02 | Link to Comment Freewheelin Franklin
    Freewheelin Franklin's picture

    Christie caved to the unions. All NJ governors do. They have to. Otherwise, they go all Anthony Provenzano on your ass.

    Wed, 08/17/2011 - 17:03 | Link to Comment syvanen
    syvanen's picture

    What does state GO bonds have to do with munis?  I thought muni bonds were county, district and city.

    Wed, 08/17/2011 - 22:44 | Link to Comment Bodvar Bjarki
    Bodvar Bjarki's picture

    Munis are state go, city, county, school districts, universities, airports, not for profit hospitals, water and sewer, electric utilities, single family housing, multi family housing, charter schools, nursing homes and the kitchen sink.

    Wed, 08/17/2011 - 17:12 | Link to Comment docj
    docj's picture

    mounting budgetary pressure presented by significant and growing funding needs for the state's unfunded pension and employee benefit liabilities, particularly in the context of a weak economic recovery, a high debt burden, limited financial flexibility, and persistent structural imbalance.

    Uh, save for a word or two this could be applied directly to the USA as well - yet didn't Fitch just re-affirm us as AAA, all the way?

    Joke.

    Wed, 08/17/2011 - 17:52 | Link to Comment max2205
    max2205's picture

    Fitch (white house) slammed s&p (tea party). But now wacks NJ (rep)

    How long will this go on?

    Wed, 08/17/2011 - 19:02 | Link to Comment digalert
    digalert's picture

    Hey Fitch, when you get done shuffling through munis and used, discarded SEC porn portfolios, could ya take a look at the USSA credit standing. I hear it stinks.

    Wed, 08/17/2011 - 19:46 | Link to Comment Atomizer
    Atomizer's picture

    NJ peasants still have change in their pockets. Progressives must go door to door to present a donation campaign to save the state against bankruptcy. I can envision the new marketing slogan..

    Kollective Government is your only HOPE

    Thu, 08/18/2011 - 00:20 | Link to Comment Bastiat
    Bastiat's picture
    US Inquiry Eyes S&P Ratings of Mortgages
    Published: Wednesday, 17 Aug 2011 | 11:11 PM ET Text Size

    The Justice Department is investigating whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities in the years leading up to the financial crisis, according to two people interviewed by the government and another briefed on such interviews.

    http://www.cnbc.com/id/44184348

    Thu, 08/18/2011 - 03:01 | Link to Comment vato poco
    vato poco's picture

    "That's the Chicago way!!"

    Do NOT follow this link or you will be banned from the site!