S&P Downgrades New Jersey General Obligation Debt From AA To AA-

We wonder if this can be blamed on Meredith Whitney too...

Standard & Poor's Ratings Services has lowered its long-term and underlying ratings on the State of New Jersey's general obligation (GO) debt to 'AA-' from 'AA'. At the same time, Standard & Poor's lowered it ratings on various state agencies' appropriation debt to 'A+' from 'AA-'; and its ratings on the South Jersey Port Corp., which the state's moral obligation pledge backs, to 'A-' from 'A'. The outlook is stable.

"The lower rating reflects our concern regarding the stresses from the state's poorly funded pension system, substantial postemployment benefit obligations, and above-average debt levels," said Standard & Poor's credit analyst Jeffrey Panger. The downgrade also reflects the application of Standard & Poor's newly adopted criteria on U.S. states, which more transparently incorporates debt, pension, and other postemployment liabilities, along with other rating factors.

Standard & Poor's also affirmed its 'AAA/A-1+' and 'AAA/A-1' ratings on debt obligations subject to our joint and several criteria following the low correlation table. In each case the long-term component of the dual rating reflects the credit quality of the obligor and an issuing bank that we rate 'A' or higher. The short term portion of each dual rating reflects the short-term rating on the bank.

New Jersey has about $2.6 billion of GO debt, $27.8 billion of appropriation-backed debt, and $2.5 billion of moral obligation debt
outstanding.

The ratings reflect what we view as the following strengths:

  • New Jersey's diverse economic base. The recession's effects and a continued slump in the real estate market have hampered employment and income performance, although we note some recent modest signs of recovery;
  • The state's high wealth and income levels, which continue to be among the highest of the 50 states; and
  • Continued improvement in balancing resources to needs in an increasingly difficult economic environment.

In our opinion, credit weaknesses include:

  • A large unfunded pension liability;
  • Significant postemployment benefit obligations; and
  • An above-average debt burden.

The stable outlook reflects Standard & Poor's view that New Jersey will continue to manage its structural budget imbalances proactively. The state's progress in managing cost pressures associated its long-term liabilities while balancing operating budget requirements will largely determine its credit direction. Should there be meaningful progress on both issues, we could raise the rating. Liabilities continuing to increase or a weaker operating budget performance could place downward pressure on the rating.