The first New Jersey city to issue bonds under the state's special fiscal year adjustment program has been greeted with a less than enthusiastic response: downgrades from both major rating agencies.

Jersey City later this week expects to wrap up its $79 million sale of the controversial "fiscal year adjustment bonds" to bond out operating costs for the first six months of the year and switch the city's Jan. 1 fiscal year start date to July 1.

Every New Jersey city that receives distressed cities aid from the fourths of its $1 billion general obligation bond authorization still unused. The commission plans a $250 million revenue issue late this state or that has a population over 35,000 was required to make the switch so that local government budget schedules jibe with the state's calendar. The bonds will be used to finance operating costs incurred during the transition period.

Jersey City plans to issue more adjustment bonds than any other city making the switch, with another $50 million sale on top of last month's issuance probably coming in December, according to city Finance Director Jane Feigenbaum.

That idea has not sat well with rating agency analysts.

Citing the magnitude of the borrowing, combined with already sizable debt obligations, Moody's Investors Service cut th ecity's rating to Baa from Baa1 late last month.

Around the same time, Standard & Poor's Corp. dropped its rating to BBB from BBB-plus, though the move was prompted more by general fiscal weakness than the issuance of fiscal year adjustment bonds, according to Nancy Feldman, a vice president at the agency.

The city's debt burden was also a major factor, Ms. Feldman said.

"If you're going to borrow $128 million for operations, what are you going to do when you need streets and sewers?" Ms. Feldman remarked. She pointed out that the fiscal year adjustment bonds will be exempted from the city's cap on debt issuance, so some capacity will be available. But from a ratings perspective, the bonds will still be a burden on the city in future years.

One factor working in favor of the city is New Jersey's Qualified Bond Program, which diverts debt service payments through the state. The added security of the system qualifies bonds sold through the program for single-A ratings. The downgrades, therefore, only affect about $4.6 million of bonds not included in the program.

The idea behind the state's calendar adjustment program was to end the costly practice many cities have of issuing temporary notes early in the calendar year in anticipation of state aid that does not show up until summer or fall.

Most analysts say that is a prudent goal that will result in real benefits for local governments down the road. But critics charge the provision allowing the use of bonds for operating expenses to make the transition leaves the process open to abuse.

Several cities, for example, have included among their operating expenses for the first six months of the year items that would not normally have appeared, in order to bond out the expenses under the calendar year adjustment process.

Jersey City officials, for example, tried to squeeze the costs of a proposed three-year contract with uniformed officers into the January to June period, but the idea was rejected by the state's Local Finance Board, which must approve local debt issuance.

Other cities have been successful in getting unusual financing needs met by the program, including the filling of underfunded self-insurance pools, reserves for uncollected taxes, and other one-time expenses that would not have been made if the opportunity for bonding was unavailable, analysts say.

And two counties, Hudson and Essex, are expected to issue significant amounts of fiscal year adjustment bonds without ever adjusting their fiscal years. The two are the only counties in the state to carry a deficit over from the 1991 fiscal year, and a special legislative provision was made for them to use the bonds to finance the shortfalls, according to Jay Johnston, a spokesman for the Local Finance Board.

Moody's this week confirmed its Al rating of Essex county, saying the use of $63 million of such bonds to finance a deficit will, in conjunction with significant personnel cuts and other cost reductions, help the county restore balance in future years.

Mr. Johnston of the Local Finance Board said the use of deficit financing was approved in part because it was clear such borrowing would be a one-time occurrence.

"Do you force these two counties to make up that deficit, which we believe to be a one-time occurrence, by squeezing out other programs, or do you allow them relief?" Mr. Johnston asked. He said the same argument applies to criticism of cities that are using the bonds for unusual expenses. "This is a one-shot deal," he stressed.

And Ms. Feigenbaum of Jersey City said spreading out the pain of the recession over 20 or 30 years by using deficit financing is appropriate in times of fiscal distress. She said the city is one of the best-equipped in the state to handle the future debt service, in part because several prime real estate locations will be developed during that period. Jersey City's easy accessibility to lower Manhattan has been cited by the rating agencies as a significant economic advantage.

Sixty-nine towns were originally required to make the fiscal year switch, but 33 asked for exemptions. One town, South Belmar, was not required to switch but sought and was granted permission anyway. About $645 million of fiscal year adjustment bonds are expected to be sold by the 37 towns involved.

Michael Johnston, an assistant vice president and manager in the public finance department at Moody's, said when the other cities come to market they will be evaluated on a case-by-case basis.

"We want to be comfortable that the amount of debt doesn't ultimately weaken bondholder security," Mr. Johnston said. "In Jersey City, the amount of debt is so sizable we felt it did have an impact on the long-term credit outlook."

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