Moody's Investors Service last week downgraded $1.1 billion of New Jersey cigarette tax bonds to Baa3 from Baa2. The outlook is negative.

The downgrade is due to cigarette consumption declining faster than anticipated. From 1997 to 2009, cigarette sales in New Jersey dropped by an average rate of 6% per year. If that continues, debt service coverage will be less than one times in 2018.

"Pledged revenues stressed by assuming a similar annual decline in revenues as that experienced since 1997 provide less than one-times coverage as of 2018," according to a Moody's report.

In addition, New Jersey may not be able to continue its practice of buying its outstanding cigarette bonds with excess pledged cigarette tax revenue, a move that helps lower debt-service payments.

"Assignment of a negative outlook reflects uncertainty regarding the state's ability to continue this practice, as declining margins may limit the amount of money available to continue to purchase bonds in the secondary market," the Moody's analysts wrote.

The state cigarette tax is $2.70 per pack, the sixth-highest rate in the U.S., according to Moody's. Neighboring Pennsylvania's tax is $1.60 per pack.

Of New Jersey's $2.70 tax, the state dedicates 65 cents to its Cigarette Tax Fund, with 78.6% of those dedicated revenues repaying the $1.1 billion of outstanding debt.

The New Jersey Economic Development Authority sold the Series 2004 cigarette-tax bonds. The bonds mature through 2034.

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