Towns and cities in New Jersey, the second-wealthiest U.S. state, lead the nation in bond-rating downgrades this year.
From Newark to Seaside Heights, home of MTV’s reality television show “Jersey Shore,” Moody’s Investors Service cut ratings on $1.7 billion in general-obligation debt issued by at least 23 municipalities in New Jersey this year, almost twice as much as the next-highest state, New York, according to a tally by Bloomberg News. The moves follow local-aid cuts by Democratic Governor Jon Corzine and his Republican successor, Chris Christie, who has also enacted a 2 percent annual cap on property-tax increases.
“It’s a great referendum on my fiscal policies,” Christie, 48, said of the downgrades on Dec. 16. “It says that we’re getting our fiscal house in order. When other states get their houses in order, they will see the downgrades too.”
Municipal bond-rating cuts by Moody’s this year also include Los Angeles, San Francisco, Philadelphia and Chicago, after the slumping housing market ate into real-estate values and assessments of property declined.
Across the U.S., local governments collected 1.8 percent less in taxes this year than in 2009, the Washington-based National League of Cities said in an October report. Revenue may continue declining into 2012 as governments lag at least 18 months behind the private sector in feeling the effects of any economic turnaround, the group said.
‘Downstreaming the Deficit’
In New Jersey, Christie has “cut back a lot to balance the budget, and one of the biggest items in those cutbacks is aid to municipalities,” Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC, a Philadelphia-based broker, said in an interview.
“They’re downstreaming the deficit,” Schankel said. “The state starts out with a deficit; they close it and cut back in a lot of areas, but the biggest impact is on municipalities.”
Christie’s state has 566 towns and cities, 604 school districts and 21 counties, more local governments per square mile than any other, according to the New Jersey League of Municipalities. This abundance of entities with the power to tax and borrow in part contributes to the overall volume of downgrades, said Howard Cure, director of municipal research at Evercore Wealth Management LLC in New York.
The governor reduced state aid to municipalities by $446 million, or 23 percent, in his first budget this year. That followed aid cuts in 2009 by Corzine. Christie also signed a law in July that cuts in half the 4 percent limit on property-tax increases enacted by Corzine. The new cap takes effect in 2011.
The tax cap has strained municipalities’ ability to make up reduced revenue, Josellyn Yousef, a Moody’s analyst, said Dec. 16 in an e-mailed statement. She attributed a “confluence of factors” to the downgrades, including high personnel costs.
“We’ve also witnessed cuts in state aid playing a significant role, as municipalities that were previously quite dependent on this revenue stream attempt to adjust budgets quickly in order to compensate for the revenue loss,” Yousef said. “These pressures have reduced current fund balance levels and liquidity, which in turn has translated to reduced financial flexibility.”
New Jersey towns and cities downgraded this year include Trenton, the state capital, and New Brunswick, home to Rutgers University.
Newark, New Jersey’s largest city, had the rating on $500 million in bonds cut this month to the fourth-lowest investment grade after “narrow liquidity necessitated cash-flow borrowing for the first time in recent years,” Moody’s said. Lower ratings can raise the cost of borrowing as investors demand higher yields in exchange for what they see as more risk.
Moody’s last month cut its rating on Wood-Ridge, a Bergen County community of 8,000 residents which relies on property taxes for nearly two-thirds of its revenue. Mayor Paul Sarlo, a Democrat, is also chairman of the state Senate Budget and Appropriations Committee.
“The way he’s balancing the state budget is just putting a greater burden on municipalities,” Sarlo said in an interview in the Statehouse. “Our municipalities are relying on less and less support from the state of New Jersey. The instability it has created only leads to these downgrades.”
Falling Home Prices
Moody’s assigned a negative outlook to all U.S. local governments in 2009, citing “unprecedented fiscal challenges” faced by American counties, cities and school districts.
New Jersey’s median income, the second-highest in the nation, dropped to $50,313 last year from $51,473 in 2008, according to the U.S. Commerce Department’s Bureau of Economic Statistics. The median sale price of an existing home in the state fell to $316,700 in the third quarter, from $349,800 in 2008, according to a report from the New Jersey Association of Realtors.
As home prices declined, the number of homeowners challenging property-tax assessments in state Tax Court jumped to 18,147 during the fiscal year ended June 30, from 10,067 in fiscal 2007, according to a report by the state judiciary.
Municipalities that avoided a downgrade this year include Summit, a Wall Street commuter town and Corzine’s former home, whose top Aaa rating was affirmed this month. Moody’s also affirmed the ratings of Fair Lawn, 12 miles (19 kilometers) west of New York City, and the shore town of Point Pleasant.
Christie, the first Republican elected governor of New Jersey since 1997, ousted Corzine as residents grew frustrated over property taxes that jumped 70 percent over a decade to an average of $7,281 in 2009, the highest in the nation.
Speaking to reporters in Trenton on Dec. 16, Christie said the downgrades are because the state is righting its finances after a decade of consecutive deficits. Balancing the state budget will be even tougher next year, he said, declining to say whether he would cut municipal aid further.
In Audubon, a borough of 8,716 people in southern New Jersey outside Philadelphia, a Dec. 14 ratings cut is “absolutely going to have a long-term impact,” said Administrator David Taraschi.
With even the smallest town-controlled streets often costing more than $1 million to resurface, Audubon and other communities may have a harder time borrowing to repair roads and sewers, he said.
“We have no real vision right now of how to fix our infrastructure,” Taraschi said in a Dec. 14 interview. “No one has the money right now.”
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