Fitch Rates New Jersey Building Authority's $20MM BANs 'F1+'
Fitch Ratings assigns an 'F1+' rating to the New Jersey Building Authority (NJBA) state building revenue bond anticipation notes, series 2012A.
The notes are expected to sell via competitive bid on Dec. 11, 2012 and are due on Dec. 15, 2013.
In addition, Fitch also affirms the 'A+' rating on the state of New Jersey's outstanding appropriation-backed debt. The Rating Outlook is Stable.
The notes are payable from payments made by the state to the NJBA pursuant to a lease, subject to legislative appropriation. The notes are expected to be redeemed by the issuance of long-term bonds issued by the NJBA which have been authorized for this purpose.
KEY RATING DRIVERS
MODEST SHORT-TERM OBLIGATION: The 'F1+' rating on the notes reflects the security provided by the already authorized issuance of long-term bonds by the NJBA and the modest size of the current offering.
APPROPRIATION OBLIGATION OF THE STATE: The 'A+' rating on the NJBA's bonds, one notch below the Fitch state general obligation (GO) bond rating of 'AA-', reflects the requirement of annual appropriations for debt service.
LONG-TERM STATE CREDIT QUALITY: The state of New Jersey's GO bond rating of 'AA-' with a Stable Outlook reflects strong wealth levels, a diverse economy, limited financial flexibility, a high debt burden, and significant long-term liabilities. The state is currently challenged by a slow economic recovery and unemployment rates that remain above national averages. Further, while management has proactively responded to past revenue weakness, and growth in state spending has been contained, the state's budget remains structurally imbalanced as full funding of annual pension obligations is several years off.
The notes being issued are special obligations of the NJBA, payable from lease rental payments made by the state of New Jersey, subject to appropriation. The resolution authorizing these notes includes authorization for their redemption by up to $50.83 million in bond proceeds that also fund project completion. The current project is exterior renovations to the state's capitol building as well as the relocation of mechanical equipment from the facility's garage. Credit strength is enhanced by the master lease structure, which encompasses numerous state buildings. Rental payments under the master lease are made semiannually directly to the trustee. The obligation of the state to make such rental payments is absolute and unconditional, subject only to annual appropriation. In the event of non-appropriation, remedies include lease termination and exclusion of the state from the facilities. Rental payments are not subject to state occupancy or use of the leased properties. Furthermore, the state budgets its rental payments with other state financing leases, thereby differentiating them from discretionary budgetary expenses.
LONG-TERM CREDIT QUALITY
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 spending pressures, including continuing capital needs, as well as 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.
Hurricane Sandy resulted in tremendous damage to infrastructure in the state, particularly to its coast line and transit operations. The total cost estimate for damages in the state has been preliminarily estimated by the state at $29.4 billion; significant federal reimbursement through FEMA is expected. How the state will fund its share of costs given its narrow cash balances prior to receiving FEMA reimbursements is uncertain, although Fitch believes that cash flow borrowing this fiscal year, beyond what the state has recently financed, is a possibility. Fitch will continue to evaluate the state's financial and economic condition as it relates to recovery from the hurricane as additional information becomes available.
For additional information on the state of New Jersey, please see "Fitch Rates NJEDA's $399MM School Facilities Construction Bonds and Notes 'A+'; Outlook Stable" dated Sept. 14, 2012, available at www.fitchratings.com.
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);
--'Rating U.S. Municipal Short-Term Debt' (Dec. 8, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
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