New Jersey's weakened credit standing is likely to dampen the fiscal outlook of many of its municipalities, particularly those urban communities that rely on state aid to fund large portions of their budgets, according to a report by Moody's Investors Service.
The report, released yesterday by the New York-based credit agency, drew no conclusions about the state's commitment to its municipalities. Instead, several Moody's analysts described the report as a clarion call to investors about future credit problems that these cities, towns, and villages might experience.
"Moody's lowering on Aug. 26 of the state of New Jersey general obligation bond rating from Aaa to Aa1 does not directly affect the credit standing of local governments," the report says.
"However, because state aid makes up a significant portion of local government revenues, particularly for countries, school districts, and heavily state-aid dependent urban communities, the state's fiscal standing remains an important credit consideration for these units," the report adds.
Amy Collings, a spokeswoman for the New Jersey Treasury Department, said officials there are sensitive to the needs of the state's municipalities, and that no decision has been made to reduce state aid to municipalities.
"The impact of [the state's budget] on municipalities will certainly be kept in mind as the fiscal year 1994 budget is crafted," she said. Ms. Collings added that state officials will make these decisions during a series of joint meetings between Gov. Jim Florio and legislative leaders beginning in the fall.
New Jersey's downgrade by Moody's followed last year's move by Standard & Poor's Corp. to AA-plus from AAA. Fitch Investors Service rates New Jersey general obligation bonds AAA, but the rating is under review. Analysts said the state's weakened credit scenario should be seen by investors as a sign of difficult economic times for a state that may be more willing to reduce its commitment to local governments rather than raise taxes.
Michael Johnston, Moody's vice president and manager of mid-Atlantic ratings, said investors should be most concerned with those municipalities that issued Fiscal Year Adjustment Bonds for deficit financing purposes.
Many state municipalities began issuing these securities in July 1991 as part of a state-mandated plan to help reduce or eliminate their need for annual cash-flow borrowings. The plan was carried out by bringing the local governments' fiscal years, which began on Jan. 1, in line with that of the state's, which begins July 1.
To help with that transition, 36 municipalities have issued $630 million of Fiscal Year Adjustment Bonds to cover the lack of state aid while they change their fiscal year. Nine municipalities will do so this year, said Jay Johnston, a spokesman for the state's Department of Community Affairs.
However, Mr. Johnston of Moody's said almost half of these local government issued bonds not just to cover missing state aid, but also to fund budget deficits.
These local government have the highest probability for future credit downgrades, he said. Mr. Johnston cited Jersey City, Passaic, and East Orange as municipalities at high risk, largely because they all share the common burdens of urban areas across the northeast such as a weak economy and a reliance on state aid. Officials from these municipalities were not available for comment.
