Fitch Affirms New Jersey EDA BEIP Bonds at 'A+'; Outlook Stable.

NEW YORK -- Fitch Ratings has confirmed its 'A+' rating to the New Jersey Economic Development Authority's (EDA) conversion of $19,035,000 Business Employment Incentive Program (BEIP) bonds 2004 series A (federally taxable) and $43,665,000 BEIP bonds 2004 series B to fixed from auction rate securities. Additionally, Fitch affirms its 'A+' rating on $201.9 million outstanding authority bonds for the BEIP program payable under a state contract. The Rating Outlook is Stable.

The 2004 series A bonds and the 2004 series B bonds, are expected to be offered through negotiation on May 7. The 2004 series A bonds and the 2004 series B bonds, presently outstanding in auction rate mode, will be purchased from tendering bondholders and converted to fixed rate bonds on May 15, 2008 for 2004B bonds and on May 22, 2008 for 2004A bonds. The current sale will also provide funds to terminate the 2004B SWAP of Nov. 1, 2004. Previously, the Nov. 1, 2005 SWAP was terminated with the termination fee paid from 2005A bond proceeds. The bonds were issued by the New Jersey EDA and are separately secured from other authority bonds. Security for the bonds consists of state payments, equal to debt service, made pursuant to a contract between the state treasurer and the authority. The payments are subject to appropriation of the state legislature.

The 'A+' rating reflects the State of New Jersey's (the state) ability to service appropriation-backed debt. Payment for the taxable bonds derives from direct state general fund appropriations, equal to debt service, pursuant to a contract entered into by the authority with the state treasurer.

When the 2004 bonds were issued, bond proceeds provided economic incentive grants to companies that locate or expand in New Jersey. The BEIP bonds are in conjunction with the state's companion economic development grant program for designated industries (DIEP). Eligibility for the program depends on job creation as measured by additional gross income tax revenues. BEIP grants provided up to 80% of such revenues, with the designated industries debt service limited to the remaining 20% portion. Amortization of the BEIP debt had been relatively short, 2009 for the series 2003 bonds. However, subsequent issues have had longer final maturities of up to 2015. The series 2004B bonds were the first under the $214 million swap agreement with three providers to cover bonds to be sold between Nov. 1, 2004-2006.

While increases in gross income tax revenues resulting from employment expansion under the incentive program are intended to exceed both programs' costs, debt service on the bonds is not dependent on additional revenues being generated. Nonetheless, with this program, the state began bonding what was previously a cash funded program, and as such, its debt service obligation for over $375 million of authorized BEIP and DIEP bonds continues even if the economic benefits do not. In recent year the state discontinued bonding for BEIP and DIEP payments and has returned to cash funding the program. In fiscal year (FY) 2008, debt service on all BEIP bonds was $50.3 million.

Fitch's rates the general obligation (GO) debt of the state of New Jersey 'AA-'. The Rating Outlook is Stable. The 'AA-' GO bond rating reflects the state's high wealth levels (second highest nationally) and a broad and diverse economy. These economic strengths have been mitigated by a high debt burden and a multitude of spending pressures, including rising debt service expenditures for school capital and other infrastructure needs, as well as escalating pension and employee benefits expenditures. Important to the direction of credit quality is a return to structural balance in the face of the aforementioned pressures. Fitch will evaluate progress regarding proposals to match spending and expected revenue growth levels and to impose additional limits on future debt issuance.

Overall revenue performance for fiscal 2008 in progress has been slightly above projections. While expected fiscal 2008 personal income tax revenues have been adjusted downward by over $200 million, this loss is offset by greater than anticipated corporate and other tax revenues. The state expects to end fiscal 2008 with a surplus balance of $1.4 billion, of which $500 million has been proposed for use in the FY09 budget while $300 million will be set aside for long term obligations. The fiscal 2009 budget as proposed is approximately $500 million below the level of the initially presented fiscal 2008 budget. Effectively $2.7 billion in spending has been reduced through limitations on growth and reduced spending. One time items total approximately $600 million, including $500 million of the aforementioned surplus, down considerably from prior years. Revenues are projected to grow by 1.6% overall. Personal income tax growth is projected at a healthy 5.7%, while sales tax growth is projected at a more moderate 2.6%, and declines are expected for corporate and other tax sources. A $1.7 billion imbalance is projected for fiscal 2010.

State non-farm employment levels in 2007 were relatively flat, rising by just 0.1% over the 2006 figure, in contrast to a 1.1% gain for the nation. March 2008 employment figures indicate growth of 0.2% over March 2007 levels, which is below the national growth rate of 0.4% for the same period. State unemployment of 4.3% for March 2008 remains below the 5.1% national level. State personal income figures, were robust in 2006, however indications for preliminary 2007 growth of 5.4% trail the national growth rate of 6.2%. Fourth quarter 2007 personal income growth also fell short of national and regional levels.

New Jersey's debt levels have risen rapidly over the past several years. The state's debt burden as of June 30, 2007, high at 7.0% of preliminary 2007 personal income, is expected to rise due to ongoing capital demands for school construction and transportation projects. Fitch notes that the state is currently considering expanding the necessity of voter approval for future debt issuances that do not carry a dedicated repayment source, which Fitch believes may limit future growth in debt levels. Asset monetization plans, which called for the leveraging of the state's toll roads to relieve the state's debt burden and to provide future transportation funding, as announced earlier this year, appear stalled and Fitch will continue to monitor developments on this front.

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