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TEXT - Fitch rates New Jersey Economic Development Auth bonds
January 15, 2013 / 4:31 PM / 5 years ago

TEXT - Fitch rates New Jersey Economic Development Auth bonds

Jan 15 - Fitch Ratings assigns an 'A+' rating to $2.2 billion of the
following New Jersey Economic Development Authority (NJEDA) school facilities
construction refunding bonds and notes: 

--Approximately $380.5 million 2013 series I (SIFMA Index Notes);
--Approximately $1.612 billion 2013 series NN bonds;
--Approximately $206.7 million 2013 series OO bonds (Federally Taxable). 

The 2013 series I notes will bear interest at a floating rate based on a fixed 
spread, established at pricing, to the SIFMA Index. The bonds and notes are 
expected to sell via negotiation on Jan. 23, 2013. 

In addition, Fitch affirms the following ratings: 

--$9 billion outstanding NJEDA state appropriation-backed obligations at 'A+';
--$2.38 billion outstanding state general obligation (GO) bonds at 'AA-';
--$1 billion garden state preservation trust bonds at 'AA-';
--The 'A+' ratings on other state appropriation-backed debt and related debt as 
detailed at the end of this release. 

The Rating Outlook is Stable. 

SECURITY 

The bonds are special, limited obligations of NJEDA; debt service is paid under 
a state contract between the state treasurer and the authority 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-' GO bond rating. 

DEBT AND UNFUNDED LIABILITIES ARE CONSIDERABLE: Debt levels have increased over 
the past decade or so due to the issuance of pension bonds, deficit bonds, and 
for transportation and court-ordered school capital needs. Outstanding debt 
obligations are compounded by significant and growing funding needs for the 
state's unfunded pension and employee benefit liabilities. 

CONTINUED PENSION LIABILITY WEAKENING: 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 several years off resulting in 
sizeable planned increases in annual contributions. 

WEALTHY ECONOMY WITH SLOW RECOVERY: New Jersey benefits from a wealthy populace 
and a broad and diverse economy. The state's economic performance continues to 
lag 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, revenues through November continued to demonstrate the current 
fiscal year's budget imbalance, which is expected to expand absent state action 
to address both an overly optimistic revenue forecast and the financial impacts 
of the hurricane. Full funding of annual pension obligations is several years 
off. Reserve balances are expected to remain narrow, offering limited 
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.

WHAT COULD TRIGGER A RATING ACTION

The 'AA-' GO rating and Stable Outlook assume that the state will act to 
maintain budget balance in the current and coming fiscal years despite revenue 
underperformance year-to-date and the effects of Hurricane Sandy. Fitch also 
assumes that pension funding will continue to increase in line with the 
established schedule. Any change in these assumptions could result in negative 
rating pressure for the GO and related credits.

CREDIT PROFILE 

The 'A+' rating on the bonds and notes reflects New Jersey's ability to service 
appropriation-backed debt. The bonds and notes are payable solely from state 
contract payments between the state treasurer and the authority. The payments 
are equal to debt service and are subject to annual legislative appropriation. 
The state legislature initially authorized $8.6 billion of school bonds 
primarily to meet capital requirements pursuant to the New Jersey Supreme Court 
holding in Abbott versus Burke regarding the adequacy of school funding. In 
2008, an additional $3.9 billion in school bonds was authorized to continue the 
program. Over $9 billion, exclusive of refunding bonds, has been issued to date.
Proceeds from the current sale will refinance outstanding school facilities 
construction bonds while reducing the program's exposure to variable rate and 
derivative risks, and replace the remaining share of the program's variable-rate
debt with floating rate notes. The 2013 series I SIFMA index issue will have 
hard serial maturities and there is no put risk or renewal risk to the NJEDA. 

New Jersey's 'AA-' GO credit rating reflects its high wealth levels and broad 
economy, offset by a 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, resulting in sizeable, planned increases in annual
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. 

Adding to the state's credit pressures is the overly optimistic revenue forecast
adopted with the fiscal 2013 budget, which began on July 1, 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 4%, and an expected 26% increase 
in corporate tax receipts. Actual receipts through November 2012 show receipts 
for the first five months of the fiscal year running 5.6% below budget ($451 
million). The underperformance is likely partly due to Hurricane Sandy, which 
made landfall on October 29, 2012 although receipts through October ran 4.1% 
below budget. 

Significant unknowns include the impact on state PIT revenues of federal tax 
rate changes related to the 'fiscal cliff,' as well as the extent and timing of 
FEMA disaster relief. Fitch assumes the state will ultimately receive FEMA aid 
at a level similar to hurricane relief offered during past disaster responses. 
The governor's budget proposal for fiscal 2014, to be released next month, is 
expected to include updated revenue estimates for fiscal 2013 and provide more 
clarity on the state's current fiscal position and plans.

Budgeted appropriations for fiscal 2013 are approximately 4.5% above estimated 
fiscal 2012 spending. Local education spending grows by $1.2 billion and the use
of one-time measures, inclusive of balance draws and expected debt 
restructuring, is similar to the prior year at about 4% of budget, though this 
figure excludes the statutorily reduced pension contribution appropriated at 
two-sevenths of the actuarially required level for fiscal 2013. 

At budget adoption, the state expected to close fiscal 2013 with an ending 
balance of $648 million, about 2% of budgeted expenditures, an estimate that has
already been reduced from the downward adjustment to the ending fund balance in 
fiscal 2012, to $447 million from an earlier-estimated $570 million. Fiscal 2012
had revenue growth of $426 million (1.5%) above fiscal 2011 levels and an ending
fund balance of $447 million that 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. 

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, and growth in 2011 was relatively flat to 2010
and below the 1.1% national growth rate. Year-over-year employment growth as of 
November 2012 was 0.5% above prior year levels, below the 1.4% national growth 
for the same period. State unemployment of 9.6% for November 2012 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% from 
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. 

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 teacher systems - using 
Fitch's more conservative 7% discount rate assumption - are weak at 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. 

As noted above, Fitch affirms at 'A+' the ratings and Stable Outlook on state 
appropriation-backed debt issued through the following authorities: 

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

Further, Fitch affirms the 'A+' rating and Stable Outlook on the State of New 
Jersey's outstanding certificates of participation, bonds issued under the New 
Jersey Municipal Qualified Bond Act, and bonds issued under the New Jersey 
School Bond Credit Enhancement Program.

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