--$220 million higher education facilities trust fund bonds, series 2014.

The bonds are expected to sell via competitive bid on Sept. 16 2014.

In addition, Fitch has downgraded the following ratings for the state of New Jersey:

--$2.16 billion general obligation (GO) bonds to 'A' from 'A+';
--$940.2 million Garden State Preservation Trust bonds to 'A' from 'A+';
--Approximately $33.5 billion of state obligations secured by the state's annual appropriation pledge as detailed at the end of this release to 'A-' from 'A';
--The program ratings assigned to New Jersey Municipal Qualified Bonds and bonds secured by the New Jersey School Bond Reserve (New Jersey School Credit Enhancement Program) to 'A-' from 'A'.

The Rating Outlook remains Negative.

SECURITY

The bonds are special, limited obligations of the NJEFA, secured by payments to the authority from the state equal to principal and interest on the bonds, subject to annual appropriation.
Appropriation bonds, certificates of participation, and Garden State Preservation Trust revenue bonds are secured by annual state legislative appropriations, and in some cases, certain defined pledged revenue streams.

General obligations of the state are secured by the full faith and credit of the state.

KEY RATING DRIVERS

GO RATING DOWNGRADE: The downgrade to 'A' of New Jersey's GO bonds incorporates the absence of long-term, fiscally sustainable solutions to close identified budget gaps in fiscal years 2014 and 2015. Following significant revenue underperformance, the state relied upon the repudiation of its statutory contribution requirements to the pension systems to return to budgetary balance, exacerbating a key credit weakness. The resurgence of sizable one-time measures to balance its operating budgets at a time of economic recovery, driven by past overly optimistic revenue forecasts and maintenance of extremely narrow financial reserves, illustrates the fiscal pressure the state faces. New Jersey's economic performance continues to lag that of the nation and a multitude of long-term spending demands are expected to prolong the achievement of sound financial operations.

APPROPRIATION OBLIGATIONS OF THE STATE: The downgrade to 'A-' of the state's appropriation-backed obligations (including those issued by the NJEFA), one notch below the state's GO bond rating, reflects the linkage to the state's GO bond rating due to the requirement for annual appropriations for debt service.

NEGATIVE OUTLOOK: Maintenance of the Negative Rating Outlook incorporates Fitch's concern that there is considerable risk that state actions to address near-term budgetary and pension challenges may leave unaddressed the state's longer-term structural and liability challenges, particularly given the state's lagging economic and revenue performance and narrow liquidity.

LONG-TERM LIABILITIES CONSIDERABLE: Above-average state debt obligations are compounded by significant and growing funding needs for the state's unfunded retirement liabilities. Continued pension funded ratio deterioration is projected through the medium term and full actuarial funding of the required contributions is several years off.

WEALTHY ECONOMY AND LAGGING RECOVERY: New Jersey benefits from a wealthy populace and a broad and diverse economy. However, the state's economic performance has lagged the nation in recovery from the recent recession, with improvement in 2013 trailing off at the close of the year, and very slow year over year (yoy) employment growth continuing through 2014.

MINIMAL CASH BALANCES RESULT IN LIMITED OPERATING FLEXIBILITY: Minimal cash balances have been maintained in recent years, providing limited flexibility to absorb unforeseen needs or revenue under-performance.

BROAD EXPENDITURE REDUCTION AUTHORITY: The governor has strong executive powers to implement any necessary expenditure reductions to balance the budget and the state has a consistent history of doing so; however, options have become more limited as the state's fixed cost burden grows.

RATING SENSITIVITIES

EFFECTIVE MANAGEMENT OF BUDGET CHALLENGES: Continued deterioration in the state's budgetary flexibility or reserves or a failure to adequately provide for its liabilities, could lead to a downgrade.

APPROPRIATION RATINGS LINKED TO STATE: The annual appropriation ratings and other ratings noted at the end of the release are sensitive to shifts in the state's GO credit rating to which they are linked.

CREDIT PROFILE

The downgrade of New Jersey's GO rating to 'A' from 'A+' incorporates the absence of long-term, fiscally sustainable solutions to close identified budget gaps in fiscal years 2014 and 2015. Achieving budgetary balance, following significant revenue underperformance at a time of national economic recovery, relied upon the state repudiating its planned statutory contribution to the pension systems. The downgrade also incorporates the resurgence of sizable one-time measures to balance its operating budgets, driven by overly optimistic revenue forecasts and maintenance of extremely narrow financial reserves.
The state's economic performance continues to lag that of the nation as it emerges from the recent recession and it faces a multitude of long-term spending pressures which are expected to prolong its achievement of sound financial operations, in Fitch's view. Financial operations have also been challenged by a multitude of long-term spending pressures including significant unfunded pension and employee benefit obligations. Additionally, the state maintains a very weak liquidity position, providing little maneuverability in its budgetary operations.

New Jersey benefits from high wealth levels and a broad economy; these positives are offset, however, by a high debt burden and sizable unfunded retiree liabilities. Despite passage of pension and benefits reform legislation in 2011 which restrained future growth in the state's accumulated liabilities, continued pension funding-level deterioration is projected through the medium term as the state's statutory plan phased in a return to full actuarial contributions over time. The state's suspension of its planned statutory contributions in fiscal years 2014 and 2015 is likely to further erode pension funded ratios. Fitch believes balancing the need for requisite pension system contributions with other long-term demands, such as infrastructure needs, property tax relief, and school funding will continue to prove difficult.

FINANCIAL OPERATIONS ARE STRUCTURALLY UNBALANCED

Projected revenues in the enacted budget for fiscal 2014 totaled $32.8 billion and incorporated growth from actual 2013 results, including: 7.7% growth in the personal income tax (PIT), 5.4% growth in the sales tax, 2.2% growth in the corporation business tax (CBT), and 76% ($166 million) growth in casino revenue resulting from the introduction of internet gaming tied to Atlantic City casinos. Given fiscal 2014 revenue underperformance through January 2014, the governor's proposed fiscal 2015 budget, released in February 2014, included a net $251 million negative revision to the fiscal 2014 revenue forecast. Factored into the revision was the expected receipt of one-time proceeds from a securitization of the state's remaining tobacco settlement revenues; the transaction brought a net $91.6 million into the general fund, without which the revenue gap would have been $342.7 million.

In addition to this revenue gap, in February the state incorporated $694 million of appropriation lapses from unexpended items, including about $94 million in pension savings from the combined effect of incorporating salary scale changes from recently adopted experience studies and a more favorable method of calculating the state's normal cost pension contributions. These lapses allowed the state to fund an increase in appropriations of $292 million for fiscal 2014.

An additional $807 million revenue gap, announced in April 2014, increased the size of the revenue shortfall for fiscal 2014 compared to the enacted budget to approximately $1.3 billion; approximately 3.9% of the state's operating budget. The state reported the shortfall was largely due to an approximate $700 million shortfall in PIT receipts for fiscal 2014. The revenue shortfall for fiscal 2014, when combined with other revenue and expenditure adjustments, created a $1.75 billion budget gap for fiscal 2015.

The governor proposed an $887 million reduction to the statutory $1.58 billion pension payment for fiscal 2014 as well as a $1.57 billion reduction from the statutory $2.25 billion pension payment for fiscal 2015 as the primary means of closing the newly-identified budget gaps. Despite legal challenge, the fiscal 2014 cut was upheld by a state superior court judge, who cited the state's emergency fiscal situation given the announcement of the gap late in the fiscal year; however, the judge did not rule on the proposed cut to the fiscal 2015 pension payment as the budget had not yet been enacted. The judge's ruling, while sustaining the cut to the pension payment in fiscal 2014, concurred with the plaintiffs' contention that pension benefits represent a contractual obligation of the state, paralleling another recent state court decision on pension benefits,.

Including the $887 million reduction to the contribution for the state's pension systems, one-time actions in the fiscal 2014 operating budget ultimately totaled just over $3 billion; equal to 9.3% of the $33.2 billion operating budget. These included $92 million in tobacco securitization, an EDA bond refunding, tax policy and revenue initiatives, the change to the normal cost pension contribution, and various appropriation offsets.

A sharp disagreement arose between the New Jersey governor and legislature on how to close the budget gap for fiscal 2015. The disagreement resulted in the governor's line item veto of $1.57 billion from the $2.25 billion pension contribution for fiscal 2015 following the legislature's approval of personal income and business tax increases to cover the scheduled pension contribution. The governor vetoed the tax increases and reduced the pension contribution instead. The timeline for resolving litigation regarding the pension contribution cut for fiscal 2015 is not yet clear.

The fiscal 2015 enacted operating funds budget is 2.1% below the final estimated budget for fiscal 2014. Appropriations have been reduced by $692 million from fiscal 2014 and total just over $32.5 billion. Revenues in support of the budget are forecast to increase by 3.5%, including; a 5.5% increase in sales tax revenue, a 4.8% increase in the PIT, a 6.5% increase in the CBT, and a 17.6% ($40 million) increase in casino revenues. One-time actions included in the budget are estimated to total $2.75 billion (8.5% of the fiscal 2015 operating budget) and include the $1.57 pension payment cut, $231 million in appropriation offsets, $324 million from the NJ Turnpike to offset appropriations to NJ Transit, and $391 million in debt restructuring. In Fitch's view, past state economic and revenue forecasts have been optimistic. The current economic and revenue forecast appears to closely match those of independent forecasters.

The state has indicated its intent to increase its ending fund balance to $388.5 million at the close of fiscal 2015; up from an estimated $300 million ending fund balance in fiscal 2014. Fitch believes this level of fund balance; 1.2% of operating revenue; would provide only limited operating flexibility in the event of future negative fiscal developments.

ECONOMIC GROWTH HAS LAGGED THE NATION

State employment growth during most of the last decade lagged the national experience, and while growth has returned following recessionary losses, the pace of expansion remains well below the national average. The state entered the recession with the nation in 2008 and its experience from 2008 to 2010 was similar, although the state recorded a decline of 1.2% in non-farm employment levels in 2010, higher than the 0.7% contraction seen nationally; growth in 2011 was essentially flat to 2010 and below the 1.2% national growth rate. Modest employment growth in both 2012 and 2013 of 1.1% was below the national 1.7% growth rate for both years.

Improved state yoy employment growth in the fall of 2013 trailed off at the year's close and employment in July 2014 was a modest gain of 0.8% yoy as compared to 1.9% yoy national employment growth. State unemployment of 6.5% for July 2014 was solidly improved from the rate one year prior at 8.3%; however, the decline in the rate is likely attributable to a yoy decline in the workforce participation rate; the state's civilian labor force declined by 43,500 and actual yoy employment increased by 32,000 in July.

New Jersey's wealth levels are high, with 2013 per capita personal income equaling 126% of the national level, ranking it fourth among the states.

COMPARATIVELY HIGH LONG-TERM LIABILITIES

New Jersey's debt levels are high for a U.S. state, and ongoing capital demands for school construction, environmental protection and transportation remain large. Net tax-supported debt as of June 30, 2014 equaled 7.4% of 2013 personal income as compared to a median of 2.6% for the states.

Unfunded pension liabilities attributable to the state are also well above average. Unfunded pension liabilities are expected to increase over the next several years absent additional reform measures and materially higher contributions than currently expected. Fitch expects the pension contribution increases, combined with expected annual increases in OPEB funding demands, to further strain the state's operating budget.

For the public employees' retirement system (PERS) and the teachers' pension and annuity fund (TPAF), as of July 1, 2013, system wide reported funded ratios were 62.1% and 57.1%, respectively. Using Fitch's more conservative 7% discount rate assumption, the plans were 56.5% and 51.9% funded, respectively. As of July 1, 2013, the state portion of pension liabilities for PERS was 46% funded on a reported basis, or 41.8% using Fitch's more conservative 7% discount rate. On a combined basis, as of July 1, 2013, New Jersey's net tax-supported debt and adjusted, unfunded pension obligations attributable to the state, as adjusted for a 7% return assumption, totaled 16.5% of 2013 personal income, well above the 6.1% median for all U.S. states.

The governor has recently convened a special pension task force to propose options for additional pension reform. In delivering the budget proposal to the legislature, the governor acknowledged the sizable and increasing burden of pension contributions and recommended that additional, as yet unspecified, reform measures be considered in the current legislative session.

RELATED DEBT

The ratings on the following credits, which are linked to the state GO rating, have been downgraded as indicated. The Rating Outlook on all the bonds remains Negative.

--Approximately $13.5 billion New Jersey Economic Development Authority annual appropriation bonds to 'A-' from 'A';
--Approximately $14.8 billion New Jersey Transportation Trust Fund Authority annual appropriation bonds to 'A-' from 'A';
--Approximately $940 million Garden State Preservation Trust revenue bonds to 'A' from 'A+';
--Approximately $541.9 million New Jersey Building Authority annual appropriation bonds to 'A-' from 'A';
--Approximately $673.5 million New Jersey Educational Facilities Authority annual appropriation bonds to 'A-' from 'A';
--Approximately $703.5 million New Jersey Health Care Facilities Financing Authority annual appropriation bonds to 'A-' from 'A';
--Approximately $440.5 million New Jersey Sports and Exposition Authority annual appropriation bonds to 'A-' from 'A';
--Approximately $671.1 million of state of New Jersey certificates of participation to 'A-' from 'A';
--The program ratings assigned to New Jersey Municipal Qualified Bonds and bonds secured by the New Jersey School Bond Reserve (New Jersey School Credit Enhancement Program) to 'A-' from 'A'.

The 'A-' ratings for the state's appropriation obligations, one notch below the state's GO rating, reflects the requirement of annual legislative appropriations for debt service. The 'A' rating for the Garden State Preservation revenue bonds reflects that while annual legislative appropriation of dedicated sales tax revenue is necessary, the provision that if the legislature fails to make the appropriation, dedicated funds may not be for any other purpose, effectively eliminates the risk of non-appropriation in Fitch's opinion, allowing for a rating on par with the state's GO debt.

Contact:

Primary Analyst
Marcy Block
Senior Director
+1-212-908-0239
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Secondary Analyst
Karen Krop
Senior Director
+1-212-908-0661

Committee Chairperson
Douglas Offerman
Senior Director
+1-212-908-0889

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com.