Fitch Ratings has affirmed the ‘A-‘ rating on approximately $171 million of outstanding unlimited tax general obligation (ULTGO) bonds of the city of Jersey City, New Jersey (the city) and the ‘A-‘ underlying rating on approximately $140 million outstanding ULTGO bonds which benefit from the New Jersey Municipal Qualified Bond Act.
The Rating Outlook is Stable.
A list of individual bond series covered by this rating action commentary is included at the end of the release.
The bonds constitute a general obligation of the city secured by its full faith and credit and unlimited taxing power without limitation as to rate or amount.
KEY RATING DRIVERS
IMPROVED OPERATING PERFORMANCE AND RESERVES: Reserve levels are improved but remain fairly modest and have been variable over time. Operations are largely funded by property taxes which are typically stable but subject to a statutory cap. Other local sources have performed well reflecting an uptick in economic activity.
STRONG ECONOMIC POSITION: The city is again experiencing strong new construction development and population growth, fueled by its waterfront position adjacent downtown Manhattan and access to numerous modes of transportation. Income and employment indicators are mixed.
BURDENSOME RETIREE LIABILITIES: Debt metrics are moderately high but not overly concerning given a rapidly descending debt structure and affordable borrowing needs. Retiree benefits, particularly health coverage, are a more significant liability despite the recent shift to a less costly plan and increased employee contributions.
IMPROVED FINANCIAL STABILITY: The demonstrated ability to stabilize operations and improve reserves could support consideration of a higher rating in the intermediate term.
ALLEVIATE RETIREE LIABILITIES: Positive rating action would also be supported by efforts to curb the city’s retiree health benefit burden, which Fitch views as very high.
Jersey City covers a land area of 15.8 square miles situated on the west side of the Hudson River, directly across from lower Manhattan. The city’s population continues to grow steadily, reaching an estimated 257,342 in 2013.
FINANCIAL RESERVES IMPROVED BUT STILL NARROW
Unaudited results for the fiscal year ending Dec. 31, 2013 show a general or current fund balance equal to $42 million, or roughly 8% of total municipal expenditures, up from $33.5 million in 2012. Fitch views the current reserve position as satisfactory, although an important credit weakness is the volatile nature of the reserves, which registered below 1% as recent as 2010. The absence of a formal fund balance policy creates some uncertainty as to the commitment to maintain an adequate financial cushion over time.
BUDGET RELIANT ON PROPERTY TAXES, PILOTs, AND ONE-TIME REVENUES
The 2014 budget continues to rely on one-time sources including a similar amount of $16.4 million of fund balance ($16.4 million) and $8 million revenue from land sales ($8 million). The city has appropriated a similar amount of fund balance each of the prior three years, during which its overall reserve position has nonetheless improved. Officials indicate the possible use of $5 million of reserves on the year reflecting continued positive performance of miscellaneous revenues tempered by higher costs for public works and public safety overtime.
The budget for 2014 totals $499.1 million, excluding grant related activity, or a 0.3% increase from 2013. The municipal tax rate is reduced by 2.1% but the levy is essentially flat due to new tax base growth. Property taxes represent the largest funding source for the budget at 43% of revenue. Property tax revenue raising capacity is constrained by a 2% statutory cap on tax levy growth, although there are exemptions from the cap for debt service, emergencies and certain increases in pension and healthcare costs. The city has levied taxes up to the full tax levy cap in each of the three preceding years, resulting in a sizable ‘bank’ of excess levy capacity.
The second largest source of revenue for the city are payments-in-lieu-of-taxes (PILOTS) derived from tax abatement agreements with condominium projects and large commercial property owners. PILOT revenues are budgeted at $112.6 million in 2014, having increased from $28.1 million in 1999. Arguably, growth in PILOT revenue is illustrative of the program’s usefulness as an economic development tool. Conversely, the abatement agreements would appear to burden the remainder of the tax base with a larger share of the municipal tax levy. Recent agreements have been shortened to five-20 year terms, versus earlier agreements which extended as long as 30 years. There are currently 37 affordable housing and 80 commercial or industrial projects with tax abatements in the city; applying the 2013 municipal tax rate on the assessed value of these properties would have generated roughly $75 million in additional tax revenue that would be shared between the city, Jersey City Public Schools, and Hudson County. There is no significant concentration in PILOT payers, with Vector and Goldman Sachs each accounting for roughly $4 million (less than 1% in revenue) each.
HIGHLY DESIRABLE WATERFRONT LOCATION
Jersey City is located near the core of the New York-Newark-Jersey City metropolitan statistical area (MSA) with convenient access to a diverse transportation infrastructure including the PATH subway system, NY Waterway ferries, and the Holland Tunnel. The MSA is the largest employment market in the country with nearly 8.8 million non-farm jobs, albeit with a high exposure to variability in the financial services sector. Jersey City’s leading employers include Goldman Sachs (3,000), Depository Trust (1,900), Pershing, LLC (1,531), JP Morgan Chase (1,748), and Barclays (1,168).
The city’s labor force exhibits a high educational standard but is of relatively young age which may suppress the city’s median household income (109% of the U.S., 81% of N.J.) and account for a March unemployment rate of 8.1% compared to the national benchmark of 6.8%.
Existing median home prices are rising, nearing $300,000 according to Zillow and Trulia suggesting the strong demand for local housing. New construction activity has picked up significantly with more than 5,600 new residential units under construction compared to 363 units in 2011 and a strong pipeline of projects in the planning or approval phase. Four new hotels (900 rooms) are under construction as well. In 2013, new development activity resulted in $118 million in new taxable value and $4.4 million in revenue for the city.
DEBT LEVELS MODERATELY HIGH, TEMPERED BY RAPID PAYDOWN
Fitch estimates the city’s overall debt burden, inclusive of overlapping obligations of Hudson County and the Hudson County Improvement Authority, at 5.6% of market value or $4,520 per capita. The city’s annual debt service obligations are fairly level through 2021 but then drop off by roughly 40% or $25 million, indicative of an aggressive approach to debt amortization. The city’s capital plan is being updated, but officials do not expect it to be materially larger than recent plans that have been sized at about $130 million. The city plans to sell between $20 million-$30 million of GO bonds this year, and come to market with similarly sized transactions every 18 months or so which should not have a meaningful impact on its debt affordability metrics.
MORE SIGNIFICANT RETIREE LIABILITIES
More concerning are the city’s pension and other post-employment benefit (OPEB) liabilities. The city administered pension plan is very poorly funded at 55.4% as of the Jan. 1, 2014 valuation date, while the state plans — the Public Employees Retirement System and the Police and Fireman’s Retirement System (PERS and PFRS) — are at 74% and 76.9% as of June 30, 2013. Fitch estimates the funded status of both the city and state plans diminishes moderately when substituting a 7% rate of return for the plans assumed rates of a fairly aggressive 8.25% (city) and 7.9% (state).
The city administered plan is relatively small, with a Fitch-adjusted unfunded actuarial accrued liability (UAAL) of roughly $106 million or 0.5% of market value. However, the city’s OPEB liability is a significant $1.2 billion. The cost of servicing the city’s debt and retiree liabilities represents roughly one-quarter of annual spending, which Fitch views as somewhat high.
The city fully funds its pension actuarial required contribution (ARC) as well as the required payments to the state plans (although the required local government contributions have averaged about 90% of the ARC the last five years). The pay-go contribution for OPEB is forecast to increase roughly $10 million every three years, likely consuming a good portion of any tax revenue growth related to development and/or capacity from the significant drop off in debt service in several years.
The following is a list of Fitch-rated bonds covered by the rating action commentary:
–(Parking Authority Project) GO general improvement bonds series 2009A;
–(Parking Authority Project) GO general improvement bonds (taxable) series 2009B;
–GO bonds series 2003;
–GO general improvement & water improvement bonds series 2003;
–GO general improvement bonds series 2003C;
–GO pension obligation refunding bonds series 2003B;
–GO qualified general improvement bonds series 2006A;
–GO qualified general improvement bonds series 2007;
–GO qualified general improvement bonds series 2009;
–GO qualified general improvement refunding bonds series 2007A;
–GO qualified school bonds series 2007A;
–GO qualified school refunding bonds series 2007C;
–GO qualified water improvement bonds series 2006B;
–GO qualified water refunding bonds series 2007B;
–GO refunding general improvement bonds series 2002A;
–GO refunding school improvement bonds series 2002B;
–General Improvement bonds (Taxable Build America Bonds – Direct Payment) series 2010B;
–General improvement bonds (Taxable Recovery Zone Economic Development Bonds – Direct Payment) series 2010C.
In addition to the sources of information identified in Fitch’s Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, University Financial Associates, S&P/Case-Shiller Home Price Index, and IHS Global Insight.
Applicable Criteria and Related Research:
–‘Tax-Supported Rating Criteria’ (Aug. 14, 2012);
–‘U.S. Local Government Tax-Supported Rating Criteria’ (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria