State fiscal reforms have helped New Jersey counties in recent years, but waste disposal and a restrictive tax cap still loom as potential problem areas, according to Moody's Investors Service.

The rating agency yesterday released the results of a statewide review of county ratings. No downgrades or upgrades resulted, leaving New Jersey with one of the most favorable county rating distributions in the nation.

Almost half of the general obligation debt of New Jersey counties is rated Aa or higher, compared with only 18% of counties nationwide. Only one county, Hudson, is rated below A, in contrast to about 23% of counties nationwide.

But Michael Johnston, a manager of regional ratings at Moody's and one of the report's authors, said in an interview that there are several reasons counties are being challenged to manage revenues more creatively.

As recessionary pressures build and mandates to spend money increase, counties in New Jersey are bumping up against the state's cap law, which restricts their ability to raise revenues through tax increases, Johnston said. In contrast to towns and cities, which are prohibited from large spending increases by the law, counties are restricted on the tax side by the cap.

"That means counties are constrained from simply increasing property tax levels to cover some of the increasing strain from this recession," he said. "It requires counties to be more creative in finding efficiencies in their operations in order to assure fiscal balance."

Hudson County, for example, has the lowest Moody's rating in the state, at Baal. Because county officials are forbidden by the cap law to raise taxes more than 5% or the rate of a federal inflation index, whichever is lower, Hudson has been trying to squeeze more efficiency out of its county government by consolidating services.

In contrast to the national trend of states mandating new services and failing to help pay the increased costs, New Jersey under Gov. Jim Florio has been assuming some of the expenses formerly borne by counties.

The state has assumed a greater share of county welfare costs, for example, helping urban counties like Camden, Hudson, and Essex the most because of their relatively large welfare populations. And New Jersey voters gave more relief to county finance officials in this month's election, approving a ballot question to switch funding for state courts from counties to the state.

While these reforms have brought welcome relief to counties, Johnston cautioned that the credit implications are not yet clear. That is because Florio's reforms were designed to allow counties to cut property taxes, and virtually every county in the state has lowered taxes "dollar for dollar" with the mandate reductions, Johnston said.

"So while it does help the overburdened tax base, it doesn't represent an immediate positive fiscal impact to the counties," Johnston said. "It's a trade-off."

The challenge to counties now is to take the benefits of tax cuts and lower spending requirements and build a base for long-term fiscal stability, he said.

Another problem the Moody's report examined is solid waste disposal. New Jersey is the most densely populated state in the nation, making it extremely difficult to find new sites for disposal.

Moody's noted in its report that New Jersey currently exports much of its waste to other states, but that practice takes many cost controls out of the hands of state and local officials. In addition, it leaves New Jersey vulnerable to federal regulatory changes now being considered that would forbid out-of-state waste transfers.

Florio has been pressing for a regional solution to the waste disposal problem, but so far only a handful of counties have banded together to address the problem.

Johnston said one surprising finding of the review was that five of New Jersey's 10 largest cities gained in population during the 1980s, in contrast to demographers' predictions that most large northeastern cities would shrink during the decade.

The population of Newark, the largest city in New Jersey, dropped a dramatic 16.4% between 1980 and 1990, to 275,000. But the next three largest cities, Jersey City, Paterson, and Elizabeth, all gained new residents during that period.

"That growth in population suggests the possibility of economic stabilization," Johnston said.

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