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Fitch Rates New Jersey Health Care Facilities Financing Authority's $249.7MM Bonds 'A+'

Posted on: Friday, 23 May 2008, 18:00 CDT

Fitch assigns an 'A+' rating to the New Jersey Health Care Facilities Financing Authority approximately $249.7 million state contract bonds (hospital asset transformation program) series 2008A. The bonds, which are expected to be offered through negotiation during the week of June 3, will be due Feb. 1, 2009 through 2038. The Rating Outlook is Stable.

The 'A+' rating reflects the State of New Jersey's ability to service state-appropriation debt. The bonds represent the second series to be issued under the Hospital Asset Transformation Act of 2000, which was designed to provide financial assistance to New Jersey nonprofit hospitals in connection with the closing of acute care hospitals no longer deemed necessary. The bonds are payable solely from state contract payments received by the authority from the state Treasurer, subject to annual legislative appropriation. Bond proceeds will be loaned by the authority to Saint Michael's Medical Center, Inc., a NJ nonprofit corporation in Newark, NJ to finance the acquisition of Saint Michael's Medical Center and various capital improvements in connection with the termination of acute care services at Saint James Hospital and Columbus Hospital (both in Newark, NJ) and the transfer of such acute care services to Saint Michael's Medical Center (SMMC). Approximately $120 million of bond proceeds will be used to acquire SMMC (and defease related, outstanding bonds) and approximately $130 million of bond proceeds will be used for various capital projects at SMMC in connection with the related acquisitions. Pursuant to the loan agreement, inpatient acute care services will cease at Saint James Hospital within six months of the SMMC acquisition and at Columbus Hospital within 12 months of the acquisition of SMMC. There is a loan agreement between the authority and SMMC. Repayment of the hospital asset transformation program bonds is not dependent on the receipt of hospital loan repayments.

Since security for the bonds rests solely on the annual appropriations to be made by the state, the 'A+' rating reflects the general creditworthiness of the state. Fitch's 'AA-' GO bond rating for the State reflects 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.

Recently, the State released updated revenue projections which indicate fiscal 2008 collections will be $533 million higher than anticipated at last review in February. Strong personal income and corporate tax receipts drove the upward revision, with collections expected to over perform by $428 million and $275 million, respectively. Sales and other tax collections have not been as strong, and estimates were lowered by $100 million and $70 million, respectively. After factoring in supplemental appropriations and other resource adjustments, the fiscal 2008 ending balance (approximately $1.8 billion) is projected to be enhanced by $350 million, and the Governor has proposed to apply these funds along with $300 million initially contemplated for the retirement of long-term obligations.

Revenue expectations for fiscal 2009 were revised downward by $159 million from the February estimates. The fiscal 2009 executive budget, as revised and currently before the state legislature, is approximately $635 million lower than the initially presented fiscal 2008 budget. To maintain at least a $600 million surplus at the end of fiscal 2009, an additional $225 million in cuts were recommended given the lowered revenue expectations and $66 million in revised spending estimates, and balance was achieved through enhanced lottery revenues, projected debt service savings resulting from the debt reduction efforts, and an additional $70 million in cuts. The use of one time items, including $500 million of the aforementioned surplus, is down considerably from prior years. Fiscal 2009 revenues are now projected to decline from expected fiscal 2008 collections by 0.6% overall. Personal income tax growth is projected at a modest 0.8%, while sales tax growth is projected at a more moderate 2%, and declines of 8.5% and 2.5% are expected for corporate and other tax sources, respectively. A slightly wider $2.1 billion imbalance is now 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. April 2008 employment figures indicate growth of 0.2% over April 2007 levels, which is slightly below the national growth rate of 0.3% for the same period. State unemployment of 5% for April 2008 is now on par with the 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% 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.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Business Wire

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