Jersey - Fitch Rates New Jersey Building Authority $29MM Refunding Revs 'A+'; Outlook Stable

Fitch Ratings assigns an 'A+' rating to the New Jersey Building Authority's (the authority) $29,155,000 state building revenue refunding bonds, 2009 series B. The bonds, which are expected to be offered through negotiation on Nov. 25, are being issued to refinance certain outstanding bonds maturing in fiscal year 2010 as part of the state of New Jersey's debt restructuring efforts for budget relief. In addition, Fitch affirms the 'A+' rating on all Fitch-rated state appropriation-backed debt. The Rating Outlook is Stable.

The 'A+' rating reflects the state of New Jersey's (the state) ability to service appropriation-backed debt and the state's 'AA-' long-term general obligation (GO) rating. The bonds being issued are special obligations of the authority, payable from lease rental payments made by the state of New Jersey, subject to appropriation. 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.

The state's 'AA-' GO bond rating reflects high wealth levels (ranked second-highest nationally) and a broad and diverse economy. These economic strengths have been 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. Revenue performance amid the current economic recession has weakened sharply, and the state's limited financial flexibility has necessitated a retreat on previous efforts designed to restore structural balance and address the state's long-term liabilities. Despite the state's reduced operating flexibility, Fitch expects that the state will continue to promptly address revenue shortfalls with actions necessary to maintain budgetary balance. Further, Fitch will continue to monitor the effects of the state's long-term obligations on its operating environment.

Revenue expectations for the recently completed fiscal year 2009 were lowered on several occasions since last fall in response to weak collections. While the adopted fiscal 2009 budget anticipated an overall revenue decline of 0.4%, a large decline of 10.6% from fiscal 2008 levels is projected. Personal income tax receipts declined from fiscal 2008 levels by a projected 18.4%, while sales taxes and corporate income taxes are expected to be 7.4% and 23.2%, respectively, below fiscal 2008 levels. The aforementioned revenue underperformance and additional spending needs necessitated approximately $4.3 billion in balancing measures, some of which were non-recurring. At present, the state expects to close fiscal 2009 with an ending balance of approximately $491 million, $244 million lower than the estimate upon which the fiscal 2010 budget was based.

The enacted 2010 budget is approximately $4 billion below the originally adopted fiscal 2009 budget and addresses an $8.2 billion current-level funding gap. A combination of revenue enhancements, federal stimulus monies, restrained growth and spending reductions were employed to close the gap, though reductions in pension funding and savings generated by restructured debt repayment account for a significant portion of the identified cuts. Many of the proposed revenue enhancements result from new personal income tax bracketing affecting the state's highest earners and each are proposed to be in effect for just one year. Other measures reduce property tax relief efforts, an area of pressure for the state. Fiscal 2010 revenue expectations include an overall decline of 1.3% from fiscal 2009 revenues. The state expects 1% growth in personal income tax receipts (though base growth would be negative without the revenue measures), 2.5% growth in base sales tax receipts, and a reduction of 3.3% in corporate tax receipts. State officials identified a revenue shortfall through the first quarter of fiscal 2010 and immediately proposed spending reduction measures to address that gap. However, through October 2009, revenues have continued to underperform estimates and, combined with newly identified spending needs and the aforementioned reduction to the expected beginning balance, a budget shortfall of approximately $800 million now needs to be addressed. The state reports that spending cuts to offset the shortfall are being evaluated and with their implementation the state expects to close fiscal 2010 with an ending balance of $501 million, matching the projection at budget adoption.

State employment growth coming out of the last recession lagged the national experience. New Jersey non-farm employment levels in 2008 declined by 0.5%, just 0.1% worse than the national decline for the same period. October 2009 employment figures indicate an employment loss of 2.9% over October 2008 levels, below the national decline of 4.0% for the same period. State unemployment of 9.7% for October 2009 is just below the national level of 10.2% for the same month. New Jersey's wealth levels are high, with per capita personal income of $51,358 equaling 128% of the national level, second among states. Personal income growth in 2006 and 2007 exceeded the national experience, though 2008 performance totaled only 87% of the national level.

The state's debt levels are high. The debt burden as of June 30, 2009 equaled 7.5% of revised 2008 personal income, and ongoing capital demands for school construction and transportation projects are large. 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 Fitch believes may limit future growth in debt levels.

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