Moody’s Investors Service Wednesday downgraded New Jersey’s outstanding general obligation bonds to Aa3 from Aa2 and cut all the state’s appropriation-backed debt to A1 from Aa3.
The rating agency cited the state’s weakened financial position and slow expectation of economic recovery as the main reasons for the downgrade.
New Jersey has roughly $12.1 billion of GO bonds outstanding, along with $32.9 billion of outstanding appropriation and moral obligation-backed bonds.
The downgrade reflects “the state’s weakened financial position and the expectation that recovery will be unlikely in the medium-term due to rapidly rising fixed costs, relatively slow economic recovery, and a lack of specified plan to rebuild fund balance,” the report said.
It also notes that public pension liabilities in New Jersey are continuing to grow rapidly, putting further pressure on the already debt-laden state.
“There isn’t any specific event that triggered this rating action now,” said Bob Kurtter, managing director of Moody’s public finance team. “We saw an accumulation of evidence and decided to go to committee and deliberate on a rating.”
Kurtter added that there were several factors taken into account when looking at the GO bonds.
“We looked at the budget that was proposed and information given on employee benefit reports for the near- and long-term,” according to Kurtter. “We also look at the overall economic and financial condition of the state and from the new information we learned in the budget process, we felt it was time to go to committee to rate.”
For several decades, Moody’s has taken state pension liabilities into consideration when rating the state’s bonds.
“We have long considered pension liabilities in analysis and because of the recession, pension liabilities are more acute pressure points in states across the country,” Kurtter said. “New Jersey has a substantial liability.”
He also noted that the state’s unemployment rate continued to decline through March and that economic recovery is projected to lag the nation.
However, there is also “no specific plan to rebuild liquidity and fund balance,” the Moody’s report says.
Despite such negative factors, however, the analysts assigned a stable outlook to the state’s new rating. A negative outlook had been attached to its previous Aa2 rating.
“We assigned an Aa3 and stable outlook which indicated in our view that as we look over 18 to 24 months, the rating is stable at this level,” Kurtter said.
He added that while the credit outlook is stable, there are several factors that could move the rating either up or down.
Sustained and higher than projected revenue growth, progress in structuring the balance sheet, and reducing debt could all help improve the state’s GO bond rating. Slower growth, failing to address liabilities, and economic recovery that lags the rest of the nation are some of the factors that could result in a further downgrade of New Jersey’s GOs.
Following the Moody’s downgrade Wednesday, Fitch Ratings affirmed the state’s AA rating, but revised the outlook to negative from stable.
In its report, the agency said the revision to negative “reflects Fitch’s elevated concern regarding the mounting budgetary pressure presented by the state’s significant and growing unfunded pension liabilities, particularly in the context of an already high debt burden, and a structurally imbalanced budget.”
Standard & Poor’s currently rates New Jersey’s GOs AA-minus with a stable outlook, following a February downgrade from AA.
Calls to New Jersey’s office of public finance seeking comment on the downgrade were not returned by press time.