Gov. Jim Florio's battle to retain New Jersey's coveted triple-A rating ended in defeat Wednesday, when Standard & Poor's Corp. downgraded the state to AA-plus.
The rating agency said three years of budgets that barely broke even and a plan to balance next year's spending plan with one-shots forced the move, which affects $3.1 billion of general obligation bonds.
The downgrade marks the end of more than 40 years of uninterrupted Standard & Poor's triple-A status for the state, according to the rating agency. Officials at Moody's Investors Service, which has rated New Jersey Aaa since 1975, said Wednesday they have no plans for an immediate reassessment.
Gov. Florio, who has frequently said maintaining the triple-A rating was one of his highest priorities, chose to emphasize the continued gilt-edged rating from Moody's in his reaction to Wednesday's news, and likened the situation to "going from being an A-plus student to an A student."
"While it's disappointing that one of Wall Street's two rating houses has taken this step, investment bankers tell us the immediate impact on New Jersey's bonds is negligible," the governor added.
Secondary market traders said the downgrade was not a surprise and the effect on yields was minimal. Longer bonds changed hands Wednesday between a 6.80% and 6.85% yield, consistent with their normal ranges.
While the movement from a AAA to a AAA-plus represents only a relatively minor adjustment from a rating agency point of view, the political fallout is expected to be significant.
New Jersey officials have given the triple-A rating a political importance that goes far beyond a simple assessment of outstanding debt. Gov. Florio, for example, used a confirmation of the rating last year as validation that his record $2.8 billion tax increase in 1990 was needed to keep the state on sound financial footing.
But George Leung, managing director of state ratings for Moody's, said ratings are not intended to be a report card on the specific actions of political figures.
"A triple-A is not a Good House-keeping seal of approval," Mr. Leung said. "Unfortunately, the ratings have taken on much greater significance than what they really are, which is a debt rating."
Nancy Feldman, executive managing director of the municipal finance department at Standard & Poor's said the political backlash against last year's tax increase tied the governor's hands on the 1992 budget. By virtually eliminating any opportunity to implement any additional tax increases this year, the governor was forced to resort to less creditworthy options, such as the one-shots eventually approved, she said.
State treasury officials enhoed the governor's disappointment with the downgrade Wednesday, saying there appeared to be signs the state was just beginning to pull out of the recession and a recovery was taking hold.
"We're very disappointed because we think that the state has done what it needed to do and shown a willingness to make some hard choices," said Larry Singer, director of public finance for the state. Mr. Singer said the downgrade sends the wrong message to other states around the country that are also grappling with large budget problems.
But Ms. Feldman said the fiscal 1992 budget passed last weekend leaves New Jersey in a poor position to capitalize on benefits associated with a recovery, if one is appearing at all.
"A lot of the recovery talk is based on anecdotal signs," Ms. Feldman said. "And while they may be true, the point is it's not only the economy that's the problem, it's the way they've structured their financial operations."
The spending plan is balanced by such one-shots as a $400 million road sale to the turnpike authority and accelerated collection of certain state utility taxes. Ms. Feldman said those plans require an economic rebound just to enable the state to fill those holes in future budgets. She said even with a rebound it is unclear that there will be enough revenue growth to meet those future needs.
Mr. Leung, however, said the use of one-shots is "understandable," given the depth of the budget difficulties in New Jersey.
"Clearly the use of one-shots leaves the state vulnerable in 1993 should the economy not recover strongly, but they have been managing the situation," Mr. Leung said.
Another indication of the state's weakening fiscal outlook, according to Standard & Poor's, is a decision to issue its first-ever tax and revenue anticipation notes, a portion of which were priced Wednesday. Almost $1 billion of the notes are being used to make pension fund payments and avoid high interest costs associated with the state's former policy of delaying the payments until later in the fiscal year.
Ms. Feldman said that was "valid" policy. But she pointed out that the rest -- which could eventually amount to about $700 million -- will go toward funding the governor's highly publicized property tax relief plan. "And that's symptomatic" of the state's weakened financial operations and lack of fund balance, she said.
