Since 2008, the issuance of general obligation debt guaranteed by local governments in New Jersey has almost tripled, according to a report by Moody’s Investors Service.
In 2008, the amount of guaranteed GO debt issued was 7.9% of all New Jersey local government issuance rated by Moody’s. In 2009, that percentage climbed toward 30% before dropping down to about 20% in 2010, and then up to 23.7% in 2011.
“The use of guarantees has proliferated against a backdrop of tighter credit markets, reduced availability of bond insurance, and weakened credit fundamentals of many private-sector entities seeking additional security for their debt,” Moody’s analysts said.
Municipalities that guarantee the debt of another entity can be exposed to additional credit risk through these liabilities.
Moody’s cites examples of New Jersey municipalities whose credit was impaired by their guarantees: Collingswood (Ba1, uncertain outlook) was stuck with the bill for a portion of a residential redevelopment project loan; Salem (Ba3, negative) was responsible for debt service payments not fully covered by office lease payments; and Hoboken (Baa1) absorbed responsibility for a hospital’s debt after it filed for bankruptcy.
Moody’s considers nonpayment of guaranteed bonds as equivalent to a default on a municipality’s own general obligation bonds.