We wanted to send everyone a note to discuss the impact on the NJ credit markets, specifically with regard to NJ municipal bonds, based upon Governor Chris Christieâ€™s declaring a State of Emergency on Feb 11â€™th, due to the $2.2 billion budget gap. The declaration places a freeze on state spending, and includes major cuts in spending. Here is a summary of what is happening.
Some of the cuts include $475 million in aid to more than 500 school districts, $32.7 million in NJ Transit subsidies, forgoing a $100 million pension payment for the current fiscal year, $62 million in aid to colleges and $12 million to hospital charity care. In addition, funding for the Department of the Public Advocate will be eliminated, and its functions will be folded into other parts of the government.
As of December 2009, New Jersey was rated AA (stable outlook) by Standard & Poorâ€™s (S&P), Aa3 (negative outlook) from Moodyâ€™s and AA- from Fitch (stable outlook). The negative outlook assigned by Moodyâ€™s reflected the state’s overall economic troubles brought on by the national recession, as well as a continued reliance on budget gimmicks and one-shot revenue sources. The $29 billion state budget that was approved in July 2009 raised taxes, depleted surplus funds, utilized federal stimulus money and restructured millions in debt to help offset record revenue losses brought on by the recession.
As the Governor finalizes his plan to close the current budget gap as well as address the larger estimated $11 billion gap for fiscal 2011, more likely then not, the rating agencies will respond. In the near term, it is likely that the state will be put on â€œwatch list negativeâ€ by the agencies, which is a ninety-day grace period during which the agencies request information from the entity, thereby entering into a dialog. After the grace period, the agencies will either confirm or downgrade the ratings; the outlook may also be assigned, which is for a longer twelve- to eighteen-month period. S&P and Moodyâ€™s have maintained their ratings for the past five and six years, respectively.
New Jersey general-obligation debt continues to trade well in spite of the negative headlines. The difficulties of New Jerseyâ€™s fiscal health did not surface overnight; it has been an ongoing development. Yields on New Jerseyâ€™s 30-year debt have risen modestly from year end to 4.99% from 4.94%. Yields on the stateâ€™s 10-year debt have followed a similar path to 3.49%. The long end of the municipal market, including New Jersey, remains difficult and less liquid. We are generally not recommending any long term bonds at this time due to the low interest rate environment, and our concern that rising interest rates will cause a significant drop in all long term bonds, not just NJ muniâ€™s.
There is no doubt that New Jerseyâ€™s budget issues may present investment opportunities in the future. However, we remain cautious with state general-obligation debt until a clearer picture presents itself. At this time, we are not changing our viewpoint on NJ municipal bonds. We think that for now, every bond purchase, ether in NJ or anywhere, should be based upon the fundamentals of the bond issuer, and that care should be given in selecting these fixed income investments. They still make tremendous sense for high income earners, especially since federal tax rates are expected to increase next year.
Since I would describe myself as a â€œFiscal Conservativeâ€, I am happy to see that someone is starting to say lets get a budget that works with the income we are bringing in. It doesnâ€™t matter if you are a family, a business or a government, rule 1 must be bring in more money then you spend. Like everyone else, I have tremendous concerns on the impact that this will have at a local level, especially with property taxes that are already some of the highest in the nation. So as of right now, I like the concept, I just need to understand the details and as I find them, I will let you know.
As always, if you have questions on this, or anything else, please feel free to contact me.