Fitch Affirms New Jersey Transportation TFA's Bonds at 'A+'; Outlook Stable.

NEW YORK -- Fitch Ratings affirms its underlying 'A+' ratings on the New Jersey Transportation Trust Fund Authority's (TTFA) $345 million transportation system bonds, 2003 series B, consisting of the following:

--$85,000,000 series B-1;

--$85,000,000 series B-2;

--$50,000,000 series B-3;

--$62,500,000 series B-4;

--$62,500,000 series B-5.

The bonds, which are presently outstanding in auction rate mode, are expected to remarketed on August 19 and will be converted to fixed rate debt in early September. Additionally, Fitch affirms the 'A+' rating assigned to $8.9 billion outstanding parity bonds. The Rating Outlook is Stable.

The 'A+' rating on the bonds is based solely on annual contract payments, subject to legislative appropriation, to be made by the State of New Jersey (the state). Authority debt service is paid under a state contract with the treasurer of the state, from payments to be made to the authority from the transportation trust fund account within the state's general fund. The payments are pledged first to debt service. The contract, pursuant to statute, specifies minimum equivalent amounts from several transportation-related taxes and fees, the vast majority of which are now constitutionally dedicated to transportation and may not be used or borrowed for any other purposes. The taxes and fees themselves are not pledged as security, only their deposit to the account. Should a shortfall occur, the contract requires the shortfall to be made up from other general fund revenues.

Reauthorization legislation passed in March 2006 resulted in $90 million in additional dedicated revenues and authorized 31-year maturities, the use of delayed principal amortization, and capital appreciation bonds. These changes, along with a fourth debt restructuring, provided capacity for a $6.4 billion five-year capital program for new projects through fiscal years 2007 and 2011. Despite these changes, this leveraging will result in all of the currently dedicated $895 million in revenues being consumed by debt service obligations by 2012 assuming issuance of the full five year program, leaving no resources for additional capital programs thereafter until new revenues are identified.

Fitch's 'AA-' GO bond rating for the state reflects high wealth levels (the 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 obligations. Fitch recognizes recent positive and decisive actions to correct a chronic structural imbalance and begin addressing the state's long-term liabilities; however, the current uncertain economic environment tempers the outlook.

Executive Order 103, issued on June 30, 2008, effectively limits spending to available recurring revenue levels and the state has applied nearly $1 billion in 2008 surplus for one-time purposes. Moreover, the state's recently passed fiscal 2009 budget reflects an absolute reduction in year-over-year spending, and despite these actions, a $1.5 billion to $2.1 billion gap still remains to be closed for fiscal 2010. Future rating direction will depend on continued progress toward fiscal balance and stabilization of the uncertain economic environment.

Strong personal income and corporate tax receipts contributed to nearly $1 billion in excess surplus for the recently completed fiscal 2008, including $684 million which will be dedicated to a newly created long-term obligation and capital expenditure fund. Monies in this fund will be applied toward capital improvements, retiring and defeasing debt, or making additional payments against pension and other post employment benefit obligations. Additional funds will be diverted to this fund, per Executive Order 103, if available at the end of a fiscal year.

As noted earlier, the enacted fiscal 2009 budget is approximately $600 million below last year's originally adopted fiscal 2008 budget. Most areas of funding sustained cuts with the exception of local support to schools, which rose along with the implementation of a new school funding formula earlier this year. The use of one-time items, which have previously been relied upon heavily, total approximately $600 million, including $500 million of programmed surplus. Fiscal 2009 revenue expectations are reasonable, though acceleration of the current downturn could threaten performance. The state expects 0.8% growth in personal income tax receipts, 1.9% growth in sales tax receipts, and a reduction of 8.6% in corporate tax receipts. Overall, revenues are expected to decline by 0.4% from fiscal 2008 levels.

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. June 2008 employment figures indicate an employment loss of 0.6% over June 2007 levels, while the nation experienced job losses of 0.1% for the same period. State unemployment of 5.3% for June 2008 is just below the national level of 5.5% for the same month. 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%. First-quarter 2008 personal income growth also fell short of national and regional levels.

The state's debt levels are high. The debt burden as of June 30, 2008 is 7.5% of preliminary 2007 personal income, and ongoing capital demands for school construction and transportation projects are large. State residents will consider this November a constitutional amendment to expand 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, have not moved forward and a revised plan is expected in the coming months.

Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this underlying rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').

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