OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to the New Jersey Economic Development Authority's (NJEDA) issuance of approximately $78.76 million of state lease revenue refunding bonds (Liberty State Park Project), 2015 series A.

The bonds are expected to be sold via negotiation on or about Nov. 5, 2015.

The Rating Outlook is Stable.

SECURITY

The bonds are special, limited obligations of the NJEDA; debt service is paid under a state contract between the state treasurer and the authority subject to annual legislative appropriation.

KEY RATING DRIVERS

APPROPRIATION OBLIGATION OF THE STATE: State contract payments provide for debt service on NJEDA obligations; payments must be appropriated annually by the state legislature, resulting in a rating one notch below the state's 'A' general obligation (GO) bond rating.

STRUCTURAL BUDGET IMBALANCE: The state's recent revenue performance has been more positive and the revenue forecast for the fiscal year that began on July 1, 2015 appears to be conservative, reducing the threat of late-year budget underperformance that has plagued the state in recent years. Despite these improvements, structural budget imbalance continues, encapsulated in pension contributions that are far below actuarially-recommended levels, and continued escalation of pension liabilities over most of the next decade is expected, barring consensus on a new round of reforms.

LONG-TERM LIABILITIES CONSIDERABLE: Above-average state debt obligations are compounded by significant and growing contribution requirements for the state's unfunded retirement liabilities. Continued pension funded ratio deterioration is projected through at least fiscal 2022, based on the governor's current proposed schedule of escalating pension contributions, absorbing a significant share of expected organic revenue growth to fulfill.

WEALTHY ECONOMY AND LAGGING RECOVERY: New Jersey benefits from a wealthy populace and a broad and diverse economy. However, the state's economic performance has lagged the nation through the current expansion with New Jersey regaining only 68% of jobs lost during the recent recession.

MINIMAL CASH BALANCES RESULT IN LIMITED OPERATING FLEXIBILITY: Minimal cash balances have been maintained in recent years and the state has no internal financial reserves to absorb unforeseen needs or revenue under-performance. The state estimates the fund balance improved to 1.9% of appropriations in fiscal 2015 with a further increase budgeted for fiscal 2016.

BROAD EXPENDITURE REDUCTION AUTHORITY: The governor has strong executive powers to implement any necessary expenditure reductions to balance the budget, and the state has a consistent history of doing so.

RATING SENSITIVITIES

APPROPRIATION RATINGS LINKED TO STATE GO CREDIT: The rating on the appropriation-backed bonds is sensitive to movement on New Jersey's GO bond rating to which it is linked.

CREDIT PROFILE
New Jersey's 'A' GO rating incorporates sizable spending pressures, structural budget imbalance evidenced by persistent underfunding of liabilities, weak liquidity, lagging economic performance and the absence of consensus on short and long-term solutions to shift the state toward more sustainable finances. Recently there have been signs of improved operating performance, and immediate budget respite was provided by a June 2015 state Supreme Court decision relieving the state from making legislated pension contributions.

The 'A-' rating for the current EDA bond issue reflects the state's pledge to make annual payments equal to debt service on this obligation, subject to appropriation by the state legislature. The current issue refunds outstanding EDA bonds issued to fund renovations and improvements at the state's Liberty State Park for debt service savings.

New Jersey benefits from high wealth and a broad economy; these positives are offset, however, by a high debt burden and sizable unfunded retiree liabilities. A previous schedule of escalating 1/7 contributions toward the pension systems' actuarially-recommended contributions (ARC) was recently ruled unenforceable by the state supreme court, leaving the system more exposed to future underfunding, in Fitch's view.

FINANCIAL OPERATIONS ARE STRUCTURALLY UNBALANCED
The state's fiscal 2014 fiscal performance was challenged by overly optimistic revenue projections, contributing to a late-year $1 billion revenue gap on the $33 billion operating budget. When combined with other revenue and expenditure adjustments, the shortfall also created a $1.7 billion budget gap for fiscal 2015. To address the gaps in both years, the governor reduced the fiscal 2014 budgeted $1.58 billion pension contribution by $883 million and proposed a $1.356 billion reduction in the fiscal 2015 pension contribution.

The pension cuts were challenged but were ultimately endorsed by the courts; the state's Supreme Court ruled that state financial obligations in excess of a low amount are subject to annual legislative appropriation unless approved by voters, effectively voiding the escalating pension contribution schedule included in the statutory agreement.

Revenues in support of the originally enacted $32.5 billion fiscal 2015 budget, which ended on June 30, were forecast to increase by 3.5%. Fitch estimates one-time actions included in the budget totaled $2.75 billion (8.5% of the fiscal 2015 operating budget), including the pension contribution cut noted earlier. The year-end operating fund balance was forecast at $388 million.

Current, estimated results for fiscal 2015 are better than originally forecast, with 5.4% operating revenue growth from fiscal 2014, inclusive of 2.1% growth in sales tax revenue, and 8.9% growth in PIT. Revenues from Atlantic City's casinos fell 6.6% as the industry undergoes a significant retrenchment with four of the city's 12 casinos closing in 2014.

Considering appropriation lapses and increases, including an additional $212 million contribution to the pension systems provided by the improved revenue results, the state estimates an ending operating fund balance of $627.6 million; this is a modest 1.9% of appropriations but an increase from the 0.9% balance in fiscal 2014.

FISCAL 2016 BUDGET SLOWS PENSION CONTRIBUTION RAMP-UP

In Fitch's view, the $33.8 billion budget for fiscal 2016, which began on July 1, is based on a more realistic revenue forecast than in the past. Total 2.7% projected revenue growth from fiscal 2015 appears to be in line with current revenue trends and is based on a forecast that incorporates steady albeit slow growth. The revenue forecast includes 3.9% expected growth in the PIT (including a post-budget earned income tax credit [EITC] expansion, growth is reduced to 3%), 2.9% growth in sales tax revenue, and 3.4% growth in the CBT. State health care spending is essentially flat to fiscal 2015, aided by a significant increase in federal aid in support of Medicaid programs.

Through September 2015, the state reports 4.7% year over year (yoy) growth from September 2014 collections on its chief revenue sources, incorporating 8.1% yoy growth in gross income tax revenue and 3.6% yoy growth in sales tax revenue. The lottery and transfer inheritance taxes also showed positive yoy growth at 7.4% and 37.2%, respectively. These positive revenue results were offset by corporation business tax revenue that is down 15.4% yoy and still sluggish casino revenue that is down 15.9% yoy.

The enacted budget reset the phase-in schedule of full actuarial pension contributions. It appropriates $1.3 billion to pensions, a sizable increase from fiscal 2015 but far below the ARC and also below the level envisioned under the 2010 reform plan ramp up. The $1.3 billion payment is equal to 3/10 of the ARC under the governor's proposed phase-in that would only reach full contribution funding in fiscal 2023. Under that scenario, the state estimates the systems' aggregate unfunded ratio will fall to a low 43.2% in fiscal 2022 and then improve, based on an average investment return assumption of 7.9%.

Pre-funding of pension commitments based on actuarial calculations supports budget sustainability, in Fitch's view. The risk of underfunding these commitments is well illustrated by New Jersey's current situation, with rapidly rising liability levels and an annual struggle to balance the need to fund pensions against other state priorities. The long timeframe to achieve full actuarial contribution funding under the governor's proposed schedule is expected to require significant, future revenue growth and will crowd out other state expenditures.

The budgeted pension contribution reset occurred simultaneously with a separate proposal by the governor's special pension taskforce for additional employee and retiree pension and health care reforms (detailed below). If implemented in their current form, Fitch believes the reforms could provide notable annual state cost savings and thus improve prospects for future budget sustainability. However, it did not appear that the proposals gained significant traction in the 2015 legislative session.

Ending fund balance in fiscal 2016 was budgeted to total $765.8 million but was reduced post-budget to $577 million by enacted measures that expanded the EITC and reserved $66.2 million in expected CBT revenue that is now constitutionally dedicated to open space preservation. Fitch believes this level of fund balance, 1.7% of appropriations, provides only a limited margin of operating flexibility relative to the state's historic experience with revenue cyclicality.

ECONOMIC GROWTH HAS LAGGED THE NATION
State employment growth during most of the last decade lagged the national experience, and while growth has returned following recessionary losses, the pace of expansion remains well below the national average. Modest 3% employment growth occurred between 2012 and 2014 compared to national growth of 5.3% between those same years. The state has yet to regain the total number of jobs lost in the recession and job recovery stands at 68% as of September 2015 versus the nation at 146%.

Employment gains in 2015 continue to be slow with growth in September 2015 at 0.1% yoy as compared to 1.9% yoy nationally. The state's unemployment rate of 5.6% for September was improved from the rate one year prior of 6.4% and although workforce participation was down marginally yoy.

New Jersey's wealth levels are high, with 2014 per capita personal income equaling 123% of the national level, ranking it third among the states.

COMPARATIVELY HIGH LONG-TERM LIABILITIES
New Jersey's debt levels are high for a U.S. state, and ongoing capital demands for school construction, environmental protection and transportation remain large. Net tax-supported debt as of June 30, 2015 equaled 7.4% of 2014 personal income, a fairly consistent level in recent years.

Unfunded pension liabilities attributable to the state are also well above average. These liabilities are expected to increase over the next several years absent additional reform measures and materially higher contributions than currently expected.

Under the new GASB 67 standard for pension systems, in the aggregate, the state's seven systems covering retired state and local employees and teachers have assets sufficient to cover only 42.5% of projected liabilities as of June 30, 2014, and all of New Jersey's large plans show significantly lower ratios of assets to liabilities under the new standards. For the two largest plans, covering state and local public employees and teachers, the new disclosure reports that assets equaled only 42.74% of liabilities for state and local public employees (PERS), and only 33.64% of liabilities for teachers.

Moreover, six of the seven state plans under the new GASB reporting disclose specific depletion dates for when assets set aside to fund benefits are expected to run out, incorporating the lack of state pension contributions in fiscals 2009 and 2010 and the appropriation cuts in fiscals 2014 and 2015. The state and local employees' and teachers' plans forecast depletion dates in 2033 and 2027, respectively. Plan liabilities payable after the depletion dates are discounted at a 4.29% muni bond index rate, rather than the 7.9% rate assumed for investment returns, elevating the reported liability. Fitch has estimated New Jersey's net tax-supported debt and adjusted, unfunded pension obligations attributable to the state, as adjusted for a 7% return, at 16.5% of 2014 personal income, well above the 5.8% median for all U.S. states.

The governor's special pension taskforce proposed wide-ranging reform to state and local pension and retiree health benefits, including freezing the current pension plans that would end the accrual of benefits for current employees and creating new pension plans that would be structured as cash-balance plans.