OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to $143.025 million state of New Jersey general obligation bonds, refunding bonds (series T).

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

In addition, Fitch has affirmed the following ratings for the state of New Jersey:

--$2.37 billion general obligation (GO) bonds at 'A';
--$884.6 million Garden State Preservation Trust bonds at 'A';
--Approximately $34.5 billion of state obligations secured by the state's annual appropriation pledge as detailed at the end of this release at 'A-'.

The Rating Outlook is Stable.

SECURITY

General obligations of the state, secured by the full faith and credit of the state.

KEY RATING DRIVERS

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

The GO rating is sensitive to the state's management of its budget and liability challenges.

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.

REDUCED PENSION PAYMENTS TO ACHIEVE BALANCE
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 (paid at fiscal year-end in New Jersey) by $883 million and proposed a fiscal 2015 contribution of $681 million in place of a $2.25 billion budgeted contribution. The state's actual contribution in fiscal 2015 was $893 million.

The pension cuts were challenged but were ultimately endorsed by the courts; the state's Supreme Court ruled that state financial obligations except for GO debt are subject to annual legislative appropriation unless approved by voters, effectively voiding the escalating pension contribution schedule included in the statutory agreement that accompanied reforms. The U.S. Supreme Court declined to hear an appeal of this case, thus leaving the ruling intact.

Fiscal 2015 recorded 5.6% operating revenue growth from fiscal 2014; an improvement upon the 3.5% growth forecast when enacting the budget. The revenue growth was inclusive of 2.7% growth in sales tax revenue and 7.6% growth in PIT.

Considering appropriation lapses and increases, and including an additional $212 million contribution to the pension systems provided by the improved revenue results, the state increased its ending operating fund balance to $823.2 million; a modest 2.5% of appropriations but an increase from the 0.9% balance in fiscal 2014 and an improvement upon the 1.9% balance that had been expected.

FISCAL 2016 AND 2017 BUDGETS SLOW PENSION RAMP-UP

In Fitch's view, the $33.8 billion enacted budget for fiscal 2016, which began on July 1, 2015, was based on a more realistic revenue forecast than in the past. Projected revenue growth from fiscal 2015 is currently estimated at 2.1% from the earlier 2.7% projection as the state has incorporated a post-session increase in the earned income tax credit and an additional allocation of CBT revenue for open space preservation. Combined, those actions now reduce expected fiscal 2016 revenue by $188 million. In total, expected revenue growth reflects the state's steady albeit slow economic growth.

The state recently updated its revenue and expenditure assumptions for fiscal 2016 with the introduction of the governor's executive budget for fiscal 2017. Revenue expectations for fiscal 2016 include 3.8% growth in the PIT (inclusive of the post-session earned income tax credit [EITC] expansion); 5% growth in sales tax revenue (up from 2.9%); and a 12% decline in the CBT. The boost in sales tax revenue largely offsets weakness in the CBT and the modest PIT adjustment that incorporates the EITC expansion. Despite positive adjustments, a 0.8% increase in appropriations will require using $37 million of the state's modest fund balance, bringing the expected ending fund balance to $786 million; 2.3% of appropriations. Fitch believes this level of fund balance provides only a limited margin of operating flexibility relative to the state's historic experience with revenue cyclicality.

The enacted fiscal 2016 budget reset the previous phase-in schedule of full actuarial pension contributions. It appropriated $1.3 billion to pensions, higher than fiscal 2015 but far below the ARC and also below the level envisioned under the 2010 reform plan ramp up. The fiscal 2016 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 funded ratio will fall to a low 43.2% in fiscal 2022 and then improve, based on an average investment return assumption of 7.9%, a relatively high level. For fiscal 2017, the governor has proposed a $1.87 billion pension contribution, equal to 4/10 of the ARC.

The governor's proposed budget for fiscal 2017 is premised on 3.1% growth in expected revenue from fiscal 2016, including 4.8% growth in the PIT, 3% growth in sales tax revenue, and flat CBT receipts. Based on recent economic growth trends, Fitch believes the revenue forecast is reasonable. The governor has proposed a 2.2% increase in appropriations from fiscal 2016. The budget also appropriates $1.3 billion toward current transportation trust fund debt service expense but no additional programmatic funding has been included as the authorization has lapsed. Fitch expects the reauthorization of the transportation program to be discussed during the current legislative session.

STATE LIABILITIES CONTINUE TO GROW

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 would require significant future revenue growth and will likely crowd out other state spending needs.

The state's unfunded actuarial accrued liability (UAAL) for its post-retirement medical benefits (OPEB) has also substantially increased in recent years. Between the July 1, 2013 and July 1, 2014 actuarial valuations, the UAAL increased by 22.7%; from $53 billion to $65 billion. The state attributes the increase to three primary factors: pay-go funding rather than prefunding accrued liabilities, new mortality assumptions extending life expectancies, and higher prescription drug costs. While Fitch views OPEB as a more flexible obligation when compared to pensions, the significant escalation in this liability is a concern.

The budgeted pension contribution reset for fiscal 2016 occurred simultaneously with a separate proposal by the governor's special pension taskforce for additional employee and retiree pension and health care reforms. The task force recently followed up with a second report that mainly echoed the recommendations made in 2015. 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 is uncertain if the proposals will gain significant traction in the current legislative session.

The state legislature is proposing to amend the state constitution, with contribution increases escalating and contributions made on a quarterly cycle rather than at fiscal year-end. Legislation to place a referendum on the November 2016 ballot has passed through one legislative session and needs to be approved in the current session in order to proceed.

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 below the national average. Modest 3% employment growth occurred between 2012 and 2014 compared to national growth of 5.3% between those same years and 2015 registered 1.4% growth compared to 2.1% for the nation. The state has yet to regain the total number of jobs lost in the recession and job recovery stands at 87% as of January 2016 versus the nation at 156%.

Growth rates in recent months have moved closer to the national average with employment gains in January 2016 registering at 1.8% yoy as compared to 1.9% yoy nationally. The improved employment situation has helped to ease the state's unemployment rates as well, which measured 4.5% for January 2016 compared to 6.4% one year prior and was below the national rate of 4.9%.

New Jersey's wealth levels are high, with 2014 per capita personal income equaling 125% 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 7.3% of 2014 personal income, a fairly consistent level in recent years. Unfunded pension liabilities attributable to the state are also well above average.

Under the 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 37.5% of projected liabilities as of June 30, 2015, and all of New Jersey's large plans show significantly lower ratios of assets to liabilities under these standards. For the two largest plans, covering state and local public employees and teachers, the new disclosure reports that assets equaled only 38.2% of liabilities for state and local public employees (PERS), and only 28.7% of liabilities for teachers.

Moreover, five of the seven state plans under GASB 67 currently report specific depletion dates for when assets set aside to fund benefits are expected to run out. 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 3.8% 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.

RELATED DEBT

Fitch has affirmed the ratings on the following credits, which are linked to the state's GO rating. The Rating Outlook is Stable.

--Approximately $14 billion New Jersey Economic Development Authority annual appropriation bonds at 'A-';
--Approximately $15.4 billion New Jersey Transportation Trust Fund Authority annual appropriation bonds at 'A-';
--Approximately $884.6 million Garden State Preservation Trust revenue bonds at 'A';
--Approximately $464.8 million New Jersey Building Authority annual appropriation bonds at 'A-';
--Approximately $824.3 million New Jersey Educational Facilities Authority annual appropriation bonds at 'A-';
--Approximately $671 million New Jersey Health Care Facilities Financing Authority annual appropriation bonds at 'A-';
--Approximately $394.4 million New Jersey Sports and Exposition Authority annual appropriation bonds at 'A-';
--Approximately $616.9 million of state of New Jersey certificates of participation at 'A-'.

The 'A-' ratings for the state's appropriation obligations, one notch below the state's GO rating, reflect the requirement of annual legislative appropriations for debt service. The 'A' rating for the Garden State Preservation revenue bonds reflects that, while annual legislative appropriation of dedicated sales tax revenue is necessary, the provision that prevents dedicated funds from being used for other purposes in the event of legislative failure to make the appropriation, effectively eliminates the risk of non-appropriation in Fitch's opinion, allowing for a rating on par with the state's GO debt.