Fitch Investors Service Inc. downgraded New Jersey's $3.3 billion of outstanding general obligation debt yesterday to AA-plus from AAA.
The rating change, which also applies to today's sale of $1.6 billion refunding bonds, was a result of the state's "complicated" financial situation, higher taxes to fund an ambitious education program, and the subsequent tax revolt in the state, said Claire G. Cohen, executive vice president at Fitch.
Fitch is the last one of three major rating agencies to strip the Garden State of its gilt-edged rating.
Standard & Poor's Corp. downgraded the state from AAA to AA-plus on July 3, 1991, and Moody's Investors Service dropped the state to Aa1 from Aaa on Aug. 24.
In a release, Fitch said that while the sale of bonds "sharply lowers the state's debt service requirements" for the next three years, the refunding will raise debt service requirements for the remainder of the 20-year amortization period.
"This rating change is not a disaster," Cohen said. "The reason for this downgrade was the uncertainty of the economic times and the decision to put off short-term debt service to take care of immediate needs."
Cohen said an AAA rating is reserved for states where "no disaster can jeopardize the payment of debt service."
The only states that Fitch continues to rate AAA are Georgia, Maryland, Missouri, North Carolina, Tennessee, Utah, and Virginia.
"The problem is that states are in a bad position," Cohen said. "What may help end a national recession can be disastrous for states."
She said the decision by New Jersey legislators to roll back the state's sales tax from 7% to 6% is an example.
While some contend that lowering taxes is the way out of a recession, because it supposedly puts more money in consumers' pockets, Cohen said that does not work for states.
"New Jersey is a state that is forbidden to run a deficit," she said. "The federal government can afford to be countercyclical because they are allowed to run a deficit."
Cohen said, though, that there has been some good news out of the state in the last year. "A renewed sense of commitment between the Legislature and [Gov. Jim] Florio's administration is a good sign," she said.
This has not been the case for all of 1992, however. Last January, party control in the Legislature switched from Democratic to Republican, and Florio is a Democrat.
Although the two branches openly warred for most of this year, Cohen said that through reforms in the state health-care industry and Quality of Education Act, "it appears as if the two parties are working together."
Cohen also said Fitch's move was not designed to keep up with the other agencies.
"I don't think that keeping up with the other agencies is the reason to downgrade a state," Cohen said. "The effects of this recession are being strongly felt in the state."
Cohen said because the state is the second wealthiest in the nation, "a stronger financial position is likely with recovery."
State officials said they were disappointed by the news, even though it was somewhat expected.
"Fitch had expressed concerns throughout the process of structuring this deal," said Robert Lurie, director of public finance for the state. "It's not that much of a surprise."
Lurie said state officials "never expect to be downgraded," but that the sale of the refunding bonds will go as planned.
Also yesterday, Standard & Poor's and Moody's both affirmed the state's rating prior to the sale of the bonds.
"Two out of the three agencies gave us a strong rating," said Richard McGrath, spokesman for State Treasurer Samuel Crane. "We take that as a pretty good sign."