New Jersey's credit quality is deteriorating with spreads widening in state-issued debt, according to Janney Capital Markets.
Janney municipal analyst Alan Schankel said in a Feb. 29 report that spreads for New Jersey general obligation bonds at 80 basis points and the New Jersey Transportation Trust Fund Authority at 184 bps are wider than for similar debt in other states, with the exception of Illinois.
Schankel said spreads have been widening for much of the last year on the Garden State's $35 billion debt, which is largely comprised of appropriation bonds where payments must be established by the legislature.
Only $2.1 billion, or 6%, of the state's debt is comprised of general obligation bonds, according to Schankel.
New Jersey has the second lowest bond ratings of the 50 U.S. states at A2 by Moody's Investors Service, and the equivalent A from the trio of Standard & Poor's, Fitch Ratings and Kroll Bond Rating Agency.
Schankel noted that the NJTTFA is rated one notch below the state by the three major rating agencies and is the largest issuer of New Jersey bonds with $16 billion in debt outstanding. Funds in the NJTTFA raised through taxes and fees can be used only for transportation purposes, but are not specifically pledged to support the issuer's debt service, Schankel said. He added that around $1.2 billion annually of NJTTFA revenue is used to support debt service, but that the state must supplement these revenues with general fund appropriations.
New Jersey faces a July 1 deadline to reauthorize TTF spending if an additional funding source is not established such as raising the state's gas tax. Gov. Chris Christie has fought back against Democratic efforts to raise the gas tax for transportation improvements and did not include any TTF funding in his $34.8 billion budget proposal.
"Investors with little or no exposure to New Jersey might consider taking advantage of wide spreads to increase portfolio yield with NJTTFA," said Schankel in his report. "But we advise against adding New Jersey debt to portfolios that already have a high exposure to the state and its various political subdivisions."
