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).