the staff of the Ridgewood blog
Trenton NJ, S&P Global Ratings downgraded New Jersey’s general obligation bonds to BBB-plus from A-minus Friday afternoon based on steep revenue losses triggered by the coronavirus. Citing economic headwinds caused by the ongoing COVID-19 pandemic, the rating agency took the action ahead of the state’s planned $4 billion-plus GO sale this month, after two other agencies affirmed the state’s rating. S&P also revised the credit outlook to stable from negative.
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“The downgrade reflects our view that New Jersey will continue to have a significant structural deficit that will be difficult to close in the coming years because of decreased revenues as a result of the COVID-19 pandemic, combined with high and increasing debt, pension, and other postemployment benefit liabilities,” S&P credit analyst David Hitchcock wrote in his report.
New Jersey has now been downgraded 13 times since 2011. The latest downgrade places S&P’s New Jersey rating one notch below Moody’s Investors Service and Fitch Ratings, which both affirmed the state, at A3 and A-minus with negative outlooks, respectively, this week, Kroll Bond Rating Agency rates New Jersey bonds A with a stable outlook.
Howard Cure, director of municipal bond research, said a recent uptick in COVID-19 cases and risks of further state shutdown orders coupled with the state’s lingering pension struggles may have factored into the S&P downgrade.
“They decided to extrapolate more in terms of the risks involved of what could go wrong and not give them any cushion about revenues improving or receiving additional federal aid,” Cure said.
New Jersey is slated to sell $4.3 billion of COVID-19 GO bonds the week of Nov. 16 broken up into $2.15 billion of Series A tax-exempt debt and $2.15 billion of Series B taxable securities.
Hitchcock noted the bonds will be sold at 12-year maturities. The $4.5 billion of net proceeds after bond premium from the transaction, he said, will equal about 11% of fiscal 2021 appropriations on a 12-month basis.
The negative outlook reflects expectations that New Jersey will be challenged in restoring budget balance over the next two fiscal years due to a lack of meaningful reserves and growing pension contributions, Moody’s analyst Baye Larsen wrote in her report Thursday. Resolution of the negative outlook, she said, hinges largely on the severity and duration of the pandemic.
Richard Raphael, president of Verify Financial, said investors might be reluctant to invest in New Jersey debt given the state’s longstanding fiscal challenges prior to the pandemic, stemming mainly from a steep pension burden.
New Jersey has the worst pension-funding rate of the 50 U.S. states at an estimated 33% for the 2020 fiscal year, according to Pew Charitable Trusts. The state budgeted $4.7 billion for pension payments in the current 2021 fiscal year, which puts it at just under an 80% actuarially determined contribution level.
“They are going to have a fairly heavy lift to absorb debt service on the bonds as well as the phase-in of the pension requirements,” he said. “If there has to be more shutdowns from COVID that just adds to the risk.”
You know we can trust the bond ratings.
Who in their right mind would loan money to NJ?
S&P and Moody’s are same agencies that assigned investment grade ratings to billions of mortgage backed securities that ultimately went bust. The idea that NJ holds an investment grade rating is unjustifiable and reflects a high degree of political influence. Our state’s tax base is eroding as its population seeks a more rational places to live. That combined with high fixed cost are the road to a likely near term restructuring of the state’s pension obligations, reduction in traditional services, and the inability to maintain infrastructure. Shame on the rating agencies as they should know better.