S&P: New Jersey Economic Development Authority 2016A Bonds Assigned 'A-' Rating; Outlook Negative
"The 'A-' appropriation rating on the authority' bonds reflects the general creditworthiness of New Jersey," said S&P Global Ratings credit analyst Carol Spain, "and its demonstrated commitment, within both the administrative and legislative branches, to repaying its appropriations-backed obligations."
The series 2016A bonds are secured by general fund appropriations from the state of New Jersey. Pursuant to the state contract between the state treasurer and the authority, the state treasurer will make payments at least equal to debt service to the trustee on or prior to each debt service payment date from the state's general fund. Under the resolution, the authority has pledged and assigned such state treasurer payments as security for the bonds. The state payments are subject to annual appropriation. Debt service payment dates of June 15 and Dec. 15, in our view, mitigate the risk of late budget adoption. Bond proceeds will finance the costs of the construction of a health sciences center, which will house a biomedical research facility and include instructional and clinical space, research offices, and laboratories. The project, in Camden, will be owned by Rutgers University and operated by a consortium of Rutgers and the Cornell Institute for Medical Research.
While some factors that would have exacerbated the state's near-term pension issues are no longer pending--namely the New Jersey Supreme Court's upholding of cost-of-living adjustment (COLA) suspension and a missed deadline for a referendum to mandate higher pension payments on the November 2016 ballot--New Jersey continues to face significant ongoing financial pressures. Updated revenue forecasts indicate that the state will report a use of general fund reserves for fiscal 2016, and the enacted fiscal 2017 budget is structurally imbalanced, which is somewhat masked by funding only 40% of pension actuarially determined contributions (ADCs).
"Given that more than seven years have passed since the official start of the economic recovery, New Jersey's struggles with a structural imbalance remain out of step with more highly rated credits," said Ms. Spain, "and the state's economic growth continues to lag the nation, contributing to growth in revenues that has not kept pace with expenditure growth."
"The negative outlook reflects our view that New Jersey's pension liabilities will remain a source of downward pressure on the rating," added Ms. Spain. While the state currently plans to increase pension contributions incrementally through fiscal 2023, there is uncertainty as to whether or not it will continue to fund its pensions based on its current funding goals. At projected funding levels, pension funding is already a source of pressure on the state's budget, which could rise above projections, whether due to weak investment returns or revised actuarial assumptions. In our view, a continuation of the current trend of declining pension funded levels could lead to diminished credit quality over the outlook horizon and bring the rating in line with its indicative rating.
While pensions remain New Jersey's most significant source of budget pressure, the state's largest revenue sources are subject to revenue volatility, as evidenced by declines in capital gains revenues over fiscal 2016 that worsened its structural imbalance. Even without a downturn in revenues, natural revenue growth has not kept pace with rising costs, and priorities other than pensions such as education, Medicaid, debt service and other postemployment benefits also contribute to the fiscal 2017 structural imbalance.
New Jersey carries limited reserves to mitigate potential volatility. Our outlook on the national economy remains positive, but any weakness in the economy or financial markets could have a significant effect on the state's fiscal condition.
An outlook revision to stable would require the implementation of credible pension reform or a demonstrated significant and sustainable funding commitment to the state's pensions that, at a minimum, reverses the trend of growing liabilities and declining funded ratios.
However, higher pension contributions would translate to less budget capacity in the near term, bringing other budget challenges to the surface. Given the state's lack of reserves and high fixed costs, New Jersey would likely need to make other budget reforms to accommodate increases in pension funding. Therefore, in our view, improvement in state's credit quality would likely be contingent on additional financial measures.