Fitch Ratings believes there is notable downside risk in New Jersey's revenue budget for fiscal 2013, due to the level of economic uncertainty and recent modest growth in actual revenues.

New Jersey's budget for fiscal 2013 projects revenue growth of 7.9% above estimated 2012 levels and attributes the increase to expected growth in personal income and sales taxes and an increase in corporate tax receipts.

Final results for fiscal 2012, which ended on June 30, are expected to show revenue growth below projections, reducing the previously estimated ending fund balance of $570 million (approximately 1.9% of expenditures).

While Fitch believes the need to address revenue underperformance is important, it expects the state's significant and growing unfunded pension and employee benefit liabilities, combined with its above-average debt burden, to remain the key challenges for New Jersey. Despite passage of pension and benefits reform legislation that will restrain future growth, continued pension funding level deterioration is projected, as full funding of the actuarially required contributions is phased in over several years.

As of June 30, 2011, pension plan funding was 60.8% on an aggregate basis. As of June 30, 2012, total debt outstanding was 7.8% of preliminary 2011 personal income. When combined with the unfunded pension obligations, this figure increases to 16.3%, well above the 6.6% median for states rated by Fitch.

While New Jersey's economy remains wealthy and diverse, to the extent that economic and revenue recovery falters, addressing these liabilities becomes even more challenging.

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