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Monday, Moody's Investors Service reduced State of New Jersey's outlook to negative from stable and assigned a rating of A1 to the $200 million School Facilities Construction Bonds, 2009 Series BB with a negative outlook reflecting the challenges to the state's financial operations.
New Jersey's school facilities construction program requires the state to cover the full cost of renovating or replacing educational facilities. Bonding covers between 40% and 100% of the state's share of approved school construction and renovation costs, depending on school district income. There are approximately $7.27 billion of bonds outstanding.
The bonds are payable solely from anticipated contract payments to be made by the State of New Jersey from its general fund. The A1 rating reflects the need for annual legislative appropriation of the contract payments, as well as the state's general obligation bond rating of Aa3.
Moody's also revised its outlook on New Jersey's net tax-supported debt, as of June 2009, of approximately $31 billion - the third highest nation. Moody's revised the outlook on the state's general obligation, annual appropriation bonds, and state intercept programmatic ratings to negative from stable.
The outlook change affects about $2.5 billion of general obligation bonds, $28.5 billion of annual appropriation debt, the New Jersey School Qualified Bond Program, and the New Jersey Municipal Qualified Bond Program.
Moody's said through several administrations, the state has utilized nonrecurring solutions to resolve budgetary gaps, leaving the state with a sizeable structural imbalance, one of the highest debt burdens, one of the lowest funded pension ratios and one of the highest post-retirement health insurance liabilities in the country.
The depletion of the state's rainy day fund, enactment of temporary tax increases and significant reliance on nonrecurring expenditure reductions including minimal pension contributions contribute to both short-term and longer term budgetary pressures resulting in the state's negative outlook.
Moody's said the state addressed an $8.25 billion budgetary shortfall for fiscal 2010 with various actions including revenue enhancements, expenditure reductions, the use of federal stimulus funds. Most of the revenue enhancements are temporary.
The reduction in pension funding is expected to further erode the state's pension funded ratio which is already low among the states. The state faces pressure to fund pension and other post-employment benefit or OPEB costs. The state's unfunded actuarial accrued liability or UAAL for the pensions is approximately $23 billion having increased from $19.2 billion in fiscal year 2007. The state currently plans to continue funding OPEB as pay-as-you-go as there is no requirement to fund the ARC.
The state's unemployment rate has also increased from 7.3% in January 2009 to 9.2% in June 2009, just below the national rate of 9.5% during the same month. The state remains vulnerable to further employment dislocations reflecting, in large measure, exposure to financial service and pharmaceutical company mergers, Moody's said.
Citing Moody's Economy.com. Moody's said while pressures from the national recession are affecting all states to a greater or lesser degree, it is anticipated that economic recovery in New Jersey will be at a slower pace than the nation as a whole.
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