Moody's Investors Service placed seven New Jersey municipalities on review for a possible downgrade on March 13, citing a heightened risk of state aid cuts.
Moody's is reviewing the general obligation ratings of Trenton, rated A3, with $347 million of debt; Newark, with $575 million of Baa1-rated debt; Paterson, rated Baa2, with $64 million; Asbury Park, rated Baa1, with $31 million; Union City, rated A3, with $49 million; the town of Kearny, rated A2, with $31 million; and Baa3 Weehawken Township, with $4.8 million of debt; the reviews affect $1.1 billion in total GO debt outstanding.
Moody's analysts Josellyn Gonzalez Yousef and Julie Beglin said that the review was prompted by New Jersey's financial constraints, which increase the risk of cuts to funding for municipalities such as transitional aid after a recent Superior Court ruling called for an increase of $1.6 billion in pension contributions for the 2016 fiscal budget.
Yousef and Beglin also noted that the January appointment of an emergency manager for struggling Atlantic City and possible adjustment of its debt may demonstrate a limit to New Jersey's willingness to provide financial support to other distressed local governments.
"During the review, we will consider each city's ability to absorb a potential loss of state support.," said Yousef and Beglin. "Negative rating pressure may result due to each city's current financial position, limited revenue raising flexibility under the state's 2% property tax cap, weak tax bases and low wealth indicators."
Moody's cited the seven cities and towns for review because of a relatively high reliance on state aid and a limited ability to compensate for cuts. The largest of these localities, Newark, had its debt rating downgraded last year by Moody's to Baa1 from A3 due to depleted reserves and liquidity.