Moody's Investors Service has revised the outlook to negative, from stable, and affirmed the Aa3 enhanced rating on New Jersey's School Bond Reserve Guarantee Program (Chapter 72). The program guarantees debt service on general obligation bonds issued by New Jersey public school districts, as well as debt issued by New Jersey counties and municipalities for educational purposes. The rating action
affects approximately $7 billion of guaranteed long-term school debt outstanding.
SUMMARY RATING RATIONALE
The Aa3 reflects our assessment of the program's ability to make timely payments on the $7 billion guaranteed debt outstanding relative to the value of the reserve corpus, $71.9 million as of June 30, 2014 (unaudited), based on the following factors:
(1) The program's strong constitutional and statutory authorizations and protections with provisions that provide an effective guarantee on debt service and reimbursement mechanism following a draw through the interception of state aid appropriated for issuers. Weaknesses in the mechanical provisions of the guarantee heighten the chance that a default might occur due to timing or human error, given the reserve's reliance on school district officials to inform the State of an impending default.
(2) A sizable but highly leveraged capital base compared to its peer group of state school bond guarantee funds, providing the reserve only a moderate ability to withstand simultaneous defaults by several large issuers. The reserve benefits from a conservative approach to the management of corpus investments. A track record of school districts never drawing upon the reserve in its 31-year history provides added comfort at the present rating level.
(3) New Jersey school districts' adequate but declining weighted average credit quality (weighted average rating of A1) due to the accumulated credit deterioration of several individual school participants. Public school finances are further bolstered by active state oversight from the state's Department of Education and Division of Local Government Services.
(4) The deteriorating financial condition of the State of New Jersey (GO rated A1 negative, downgraded from Aa3 negative in May 2014). Although the Chapter 72 School Bond Reserve's rating is not directly linked to the state's General Obligation rating, the state's credit rating is a measure of its ability to replenish reserve draws, continue strong oversight of school districts and fund school districts through annual state aid appropriations.
OUTLOOK
The negative outlook reflects the weakening credit profile of New Jersey's public school districts (weighted average rating of A1) and the State of New Jersey. Further deterioration of either of these could lead to a downgrade of the Chapter 72 program.
