N.J. Deserves Lower Bond Rating, Merrill Lynch Says (Update1)
March 29, 2010, 2:22 PM EDT(Adds bond spreads in the fourth paragraph.)
By Terrence Dopp
March 29 (Bloomberg) -- New Jersey’s bonds should be ranked a step below those assigned by the three major credit-rating firms, as the state faces a $46 billion pension deficit and record high debt-load, Merrill Lynch analyst John Hallacy said.
The state’s general obligations are rated Aa3 by Moody’s Investors Service, AA by Standard & Poor’s, and AA- by Fitch Ratings, the fourth- , third- and fourth-highest investment grades, respectively. New Jersey is the third-most indebted U.S. state according to Moody’s, and expanded its borrowings to a record $33.9 billion as of June 30, from $31.8 billion a year earlier.
“We are revising our view on New Jersey’s credit in light of the state’s sizable debt load, severely unfunded pension and health-care retirement benefits liabilities, and aggressive budget assumptions for its fiscal year ending 30 June 2011 which we believe will be difficult to achieve,” said Hallacy, a municipal strategist in New York at the Bank of America Corp. unit, in the report. “In our opinion, New Jersey’s general obligation bonds should be viewed as A1/A+ equivalents.”
New Jersey’s debt traded 29 basis points more than an index of generic AAA municipal bonds as of March 26, nearly double the 0.15 percent premium investors demanded for owning its debt on Jan. 1. An index of A1 rated debt traded at a premium of 40 basis points. A basis point is 0.01 percentage point.
Governor Chris Christie, 47, a Republican, on March 16 called for $10 billion in spending reductions to help close a $10.7 billion budget hole without raising taxes. His plan would cut more than $1.2 billion from aid to schools and municipalities, lower transit funding and skip the state’s $3 billion payment into the pension system.
‘Continuing Concern’
The lapsed pension funding is “cause for continuing concern,” the report said.
Andrew Pratt, a spokesman for Treasurer Andrew Eristoff, said his office hadn’t seen a copy of the report and declined to immediately comment.
Christie’s cuts may result in “significant” firings of teachers and government workers, prolonging the state’s economic recovery, said Howard Sitzer, a research analyst on the report. The governor will face a crucial test in whether he can push his plan unchanged through the Democrat-controlled Legislature, the analyst said.
“There is going to be change and there will be dislocation,” Sitzer said in an interview. “Invariably, there are going to be layoffs. These are real jobs, which could protract” the recovery.
Moody’s in August cut its outlook on the state’s debt to negative from stable, after the U.S. recession that began in December 2007 hurt tax revenue and prompted the state to deplete its reserves. The outlook change raised the possibility that New Jersey’s long-term credit ratings may be reduced.
--Editors: Walid el-Gabry, Stacie Servetah
To contact the reporter on this story: Terrence Dopp in Trenton, New Jersey, at tdopp@bloomberg.net.
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.
