TRENTON-The effect of Fitch Ratings’ downgrade of the State of New Jersey's outstanding general obligation (GO) bonds to AA- from AA remains uncertain--and some observers wonder why it happened at all. In addition to the GO bonds, Fitch downgraded the Garden State Preservation Trust’s open-space revenue bonds from AA to AA- and the state’s appropriation-backed debt and other related debt to A+ from AA-. The agency also revised its rating outlook for all affected bonds to stable from negative.
In a statement announcing the downgrades, Fitch cited “the mounting budgetary pressure presented by significant and growing funding needs for the state's unfunded pension and employee benefit liabilities, particularly in the context of a weak economic recovery, a high debt burden, limited financial flexibility and persistent structural imbalance” for the action.
Though New Jersey’s overall wealth and diverse economy are a positive, Fitch says, the state’s debt remains high, and its long-term pension and employee benefits are “significant,” the agency said in the announcement.
“This action by Fitch brings its rating on the state in line with those adopted by Standard & Poor’s and Moody’s earlier this year,” says William Quinn, a spokesman for the state Treasury Department, in a statement. “Fitch’s biggest concern seems to be that the state is not putting enough money into its pension plans. The administration has a funding plan in place that will address this concern over the long term without shortchanging the other critical needs of the state and efforts needed to expand the state’s economy. As the administration continues to actively manage its fiscal assets, New Jersey will see its finances and its credit ratings stabilize.”
Fortunately, “We have not seen significant impact on the performance of the state bonds so far,” Quinn elaborated to Globest.com. “That’s a positive.”
Gualberto “Gil” Medina, Cushman & Wakefield’s executive managing director in New Jersey, wonders why Fitch downgraded the state’s debt at all, given that the problems the agency cites have been around for years.
“I felt it was unwarranted,” Medina says. “The issues Fitch is raising have existed for a decade, decade and a half. And they’ve determined to do it when those issues are being addressed. It was surprising that they would decide to downgrade the state’s credit, especially considering the significant reforms that have been put in place and are under way.”
While the Republican Christie administration and the Democratic leadership may disagree on the means, Medina says, they do agree that the state must get its fiscal house in order.
The effect of the downgrade on commercial real estate is “uncertain,” says Michael McGuinness, CEO of NAIOP New Jersey. If the cost of borrowing rises, “its just another obstacle in the way.
“Fortunately, some of our members are self-funded,” McGuinness says. “Others are not. And this year there are a lot of loans coming due. We are just bumping along the bottom right now, and this doesn’t help.”
Still, the real problem, McGuinness says, remains employment. June 2011 employment was 0.4% below June 2010 levels, comparing negatively to a US gain of 0.9% for the same period, Fitch noted. “New Jersey unfortunately has a high unemployment rate,” McGuinness tells GlobeSt.com. “There are things the administration can do to help, and they’re doing a lot.”
Investing in infrastructure is critical, he adds. The governors of New Jersey and neighboring New York are taking “bold steps,” he says, particularly in investing in infrastructure. Medina foresees no impact at all, as the state’s commercial real estate is more affected by economic activity than by credit rating.
“The key for commercial real estate will be a well-performing regional and local economy,” he says. “Because of reforms, I believe the economy of New Jersey will be experiencing fairly robust growth and employment growth. That will fuel commercial real estate growth.”
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
