Fitch Downgrades $6.4B NJ School Credit Enhancement Program to 'AA'

Business Wire, July 21, 2003

Business Editors

NEW YORK--(BUSINESS WIRE)--July 21, 2003

Fitch Ratings downgrades the rating of the New Jersey School Credit Enhancement Program's New Jersey School Bond Reserve (reserve) to 'AA' from 'AA+'. The rating is removed from Rating Watch Negative, on which it was placed on June 17, 2003. The Rating Outlook is now Stable. The program rating is assigned, upon request, to long-term local general obligation bonds in New Jersey issued for school purposes based on the reserve's statutory backing of such debt. The reserve is a part of the New Jersey Fund for the Support of Free Public Schools (the fund). The program rating is potentially applicable to approximately $6.4 billion of outstanding municipal bonds, many of which also are insured.

The downgrade results from several events that have occurred over the past several years: the fund's investment performance, an expected increase in school debt issuance, significantly increased transfers to the state's general fund for budget relief, and the recent enactment of legislation that weakens reserve requirements in the future.

Between the end dates of fiscal 2000 and fiscal 2002, the fund's overall balance, including, but not limited to, the reserve, dropped from $155.4 million to $122.2 million due to bear market investment losses and expected transfers to the state's general fund to support public education. These events caused the ratio of the fund's total balance to reserve holdings - a key measure of the program's financial health -- from 2.4:1 to about 1.4:1. In fiscal 2003, although investment earnings have improved for the fund, the state has chosen to increase the fund's transfers to the state significantly from $10.6 million in fiscal 2002 to a projected $30.1 million in fiscal 2003, potentially varying slightly from this figure based on year-end adjustments, in order to provide budget relief. At the end of fiscal 2003, the reserve is expected to be $96.0 million, and the ratio of the fund's balance to reserve holdings will be approximately 1:1. This means that future school debt growth outpacing growth in the fund's riparian rights and investment revenues will require an external funding source (state subsidies) in order for required reserve levels to be maintained. In short, the fund is less able to support its own reserve funding requirements, as it has in the past.

Assembly Bill 3721, signed into law by Gov. James McGreevey on July 1, 2003, decreases the required reserve level to 1% under a methodology that creates two separate, but fungible and interlinked, reserves: one for prior school debt at the previous level of 1.5% of par outstanding and another for future school debt at 1% of par outstanding. The state 'agrees' in the law that the state treasurer shall annually deposit into the school bond reserve amounts needed to keep the accounts funded at the newly established levels. Even at the 1% reserve level, which would not be reached until all prior school debt is retired over the next two decades, the reserves would be able to cover an unprecedented number of school defaults. Fitch estimates that this amount could cover an estimated 40 one-year defaults by average-sized school issuers in the state. Importantly, other statutory provisions long in place to enhance the credit quality of several large districts with a history of financial and operational distress, including the qualified bond program, remain in place and limit the exposure of the reserve.