Fitch Rates Jersey City, NJ's Real Property Tax Appeal Rfdg Notes, Series 2007B 'F1'

August 14, 2007 02:52 PM Eastern Daylight Time

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a short-term 'F1' rating to the City of Jersey City, NJ's (the city) $5 million general obligation (GO) real property tax appeal refunding notes (TARNs), series 2007B. The notes are scheduled for competitive sale on Aug. 23. Additionally, Fitch affirms the underlying 'BBB' rating on the city's approximately $407 million GO bonds. The Rating Outlook is Stable.

The 'F1' rating reflects a history of strong market access for real property TARN sales, a modest balance of outstanding TARNs (including this issue) relative to the budget, and the long-term credit characteristics consistent with the GO pledge of Jersey City. The 'BBB' rating on the city's outstanding GO bonds reflects strong property tax collection rates, moderate debt levels, and a favorable geographic location. Jersey City experienced strong economic growth over the past 10 years, primarily due to increased commercial and residential development, and it has consistently maintained sufficient operating reserves. The city's dynamic and diversified economy, if its strong growth is sustained, will provide longer term mitigation of risk factors including above-average unemployment rates and below-average wealth levels. Other risks include an operating position that remains under pressure from a high fixed-cost base due in part to growing health care and benefits expenditures. Jersey City began issuing TARNs in 1991 to finance the payment of property tax appeals. TARNs are issued throughout the year to pay current-year appeals and a portion of outstanding TARNs not covered by appropriations in the current-year budget. The payment schedules typically range from five to eight years and are determined by the New Jersey local finance board when the TARNs are approved for issuance. While Fitch does not view the extension of current-year expenses to long-term obligations positively, this practice is consistent with the city's below-average 'BBB' GO rating. However, reflecting improving financial performance, the city has prudently appropriated higher amounts in recent years to pay current-year appeals, decreasing the total amount of outstanding notes. Indicating strong market access, the city's last three TARN sales garnered seven bids each.

Located in Hudson County (GO bonds rated 'A+' with a Stable Outlook by Fitch) just across the Hudson River from New York City, Jersey City continues to experience substantial growth as redevelopment efforts along its waterfront areas drive increased commercial, industrial, and residential investment. As a result, equalized property values have grown by a strong 20.5% on an average annual basis since fiscal 2000. The city's population, which has recouped the losses sustained during the 1970s through modest growth in the 1980s and 1990s, has been relatively stable since the 2000 census. The 2005 census estimate indicated a slight drop from the 2000 figure. Due to the city's proximity to New York City, employment in the finance, insurance, and real estate (FIRE) sector exceeds state and national averages, and Jersey City counts several major investment firms among its top employers. The unemployment rate declined annually from 2002-2005, dropping from a high 8.8% in 2002 to 5.9% in 2005 before increasing modestly to 6.0% in 2006. However, the May 2007 level of 5.5% continued the downward trend, declining from 6.3% in May 2006. Per capita money income in 2005 represented 69% of the state's high average and 87% of the national level.

The city's financial performance remains inconsistent, strained by rising health insurance and other employee-related costs. However, a recent debt restructuring introduced some debt service relief for the near term, and it will help reduce the city's structural budgetary imbalance. Following an operating deficit of approximately $10.2 million in fiscal 2005, which reduced the city's current fund balance to $23.8 million, or 6% of municipal spending, Jersey City posted a current fund surplus of about $9.8 million in fiscal 2006, lifting the fund balance to $31.8 million, or 7.4% of spending. The unreserved, undesignated fund balance for fiscal 2006 was about $19.4 million, or 4.5% of spending. While the city began fiscal 2007 with an approximately $19 million structural gap, year-to-date 2007 results show positive budget-to-actual variances driven by nearly $10 million in above-budget revenues from payments in lieu of taxes that resulted in the net use of about $8 million of current fund reserves. As a result, total current fund balance equaled about $27.7 million, or 4.6% of current fund spending, and $11.3 million or 1.9% of current fund spending on an unreserved, undesignated basis. While reduced, this reserve level remains sufficient for the rating level.

Jersey City's debt levels remain moderate. Strong increases in equalized values of city property significantly reduced the overall debt burden from 5.1% of fiscal 2002 equalized market value to 2.37% for fiscal 2007. Overall debt per capita, reflecting increased borrowing and stable population levels, expanded over the same period from $1,589 to $1,954. Debt levels may grow modestly, as the city's $191.2 million capital improvement plan (CIP) will be primarily debt funded. Debt issued on behalf of Jersey City's school district is issued and funded by the state. The city's school district is considered an Abbott district for state funding purposes, indicating its tremendous need for increased funding and educational improvements. Jersey City also provides a GO backup pledge to Municipal Utility Authority (MUA) debt; however, the city has never paid debt service on bonds supported by MUA revenues. Annual water rate increases through fiscal 2015 are designed to ensure MUA's continued self-sufficiency.

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Contacts

Fitch Ratings, New York
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