OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to $92.24 million state of New Jersey building authority (NJBA) state building revenue refunding bonds, 2016 series A.

The bonds are expected to be sold via negotiation on or about March 23, 2016.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

APPROPRIATION OBLIGATION OF THE STATE: State lease payments provide for debt service on NJBA 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 fiscal 2016 budget was not structurally balanced as enacted when pension contributions, which are far below actuarially-recommended levels, are taken into account. Escalating pension contributions are likely to absorb a significant share of expected organic revenue growth in upcoming years.

LONG-TERM LIABILITIES CONSIDERABLE: Above-average state debt obligations are compounded by significant and growing unfunded pension liabilities. Continued escalation of pension liabilities over most of the next decade is expected, barring consensus on a new round of reforms.

WEALTHY ECONOMY AND SLOW RECOVERY: New Jersey benefits from a wealthy populace and a broad and diverse economy. However, the state's economic performance has lagged the nation's through the current expansion with New Jersey regaining only 87% of jobs lost during the recent recession.

LIMITED OPERATING FLEXIBILITY: Minimal cash balances have been maintained in recent years and the state has limited internal financial reserves to absorb unforeseen needs or revenue under-performance. The state's operating fund balance improved to 2.5% of appropriations in fiscal 2015 although a slight decrease is expected in fiscal 2016. Fiscal 2016 revenues are currently meeting the fairly conservative revenue forecast upon which the budget was based.

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 RATING 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, and the absence of consensus on short and long-term solutions to shift the state toward more sustainable finances. Economic performance has been a drag on the state the past several years but an uptick in performance was seen in 2015 as both employment growth and the unemployment rate improved relative to national averages. Financial performance also modestly improved in 2015, allowing for an addition to the cash balance, although current projections indicate a lower balance in fiscal 2016.

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. Pension reform efforts undertaken in 2010 and 2011 remain subject to ongoing litigation and the state Supreme Court ruled in 2015 that a previous schedule of escalating 1/7 contributions toward the pension systems' actuarially-recommended contributions (ARC) was unenforceable. The U.S. Supreme Court declined to hear an appeal of this case, thus leaving the ruling intact. Cohesive movement toward additional pension and retirement health benefit reforms is uncertain and the state legislature has instead proposed an amendment to the state constitution that would pay contributions on a set quarterly schedule, while the governor continues to seek cost reductions. In Fitch's view, the continuing escalation in the state's unfunded liabilities for pension and health benefits is a credit negative.

The 'A-' rating for the current NJBA 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 NJBA bonds and bond anticipation notes.