WASHINGTON (MNI) – The following is the text of a press release
issued Wednesday by Fitch ratings downgrading the ratings of the state
of New Jersey:

Fitch Ratings downgrades the State of New Jersey’s outstanding
general obligation (GO) bonds to ‘AA-‘ from ‘AA’.

Fitch also downgrades to ‘AA-‘ from ‘AA’ the rating on the Garden
State Preservation Trust’s open space revenue bonds.

Additionally, Fitch downgrades to ‘A+’ from ‘AA-‘ the ratings on
the state’s appropriation-backed debt and other related debt, which is
detailed at the end of this release.

The Rating Outlook for all affected bonds is revised to Stable from
Negative.

KEY RATING DRIVERS

–The downgrade of the state’s GO rating to ‘AA-‘ from ‘AA’
reflects the mounting budgetary pressure presented by significant and
growing funding needs for the state’s unfunded pension and employee
benefit liabilities, particularly in the context of a weak economic
recovery, a high debt burden, limited financial flexibility, and
persistent structural imbalance.

–Despite recent, significant action to contain future growth in
the state’s accumulated pension liability, continued funding level
deterioration is projected through the medium term as full funding of
the actuarially required contributions is phased in, resulting in
sizeable increases in annually required contributions. Fitch believes
that meeting the requisite increases in pension contributions will be
challenging and is likely to conflict with other long term challenges,
such as property tax relief, school funding, and infrastructure needs.

–Management has proactively responded to past revenue weakness,
and growth in state spending has been contained. Nevertheless, the
state’s budget remains structurally imbalanced inclusive of unfunded
pension contributions. Reserve balances are expected to remain narrow,
offering limited flexibility to absorb unforeseen needs.

–New Jersey benefits from a wealthy populace and a broad and
diverse economy. The state’s recent economic performance has been weak
and the state is expected to lag the nation in recovering from the
recent recession.

–New Jersey’s debt position remains high, and the state’s long
term pension and employee benefits obligations are very significant.

SECURITY

The bonds represent general obligations of the state, with faith
and credit pledged.

CREDIT PROFILE

The downgrade of New Jersey’s GO bond rating to ‘AA-‘ from ‘AA’
reflects the mounting budgetary pressure presented by significant and
growing funding needs for the state’s unfunded pension and employee
benefit liabilities, particularly in the context of a weak economic
recovery, a high debt burden, limited financial flexibility, and
persistent structural imbalance. The credit rating, at the current level
reflects its high wealth levels and broad economy, offset by a high debt
burden and a multitude of spending pressures, including continuing
capital needs, as well as significant unfunded pension and employee
benefits obligations. Despite the recent passage of pension and benefits
reform legislation, which will restrain future growth in the state’s
accumulated liabilities, continued pension funding level deterioration
is projected through the medium term as full funding of the actuarially
required contributions is several years off, resulting in sizeable
increases in annually required contributions. Fitch believes that
meeting the requisite increases in pension contributions will be
challenging and is likely to conflict with other long term challenges,
such as property tax relief, school funding, and infrastructure needs.

The fiscal 2011 budget as adopted last year addressed a $10.9
billion current-law funding gap without broad based tax increases and
with significant spending reductions, though a large portion of the gap
was closed by forgoing the state’s $3.1 billion pension contributions, a
source of budget relief the state has repeatedly relied on in recent
years. The budget assumed overall revenue growth of 1.5%, despite the
sunset of a temporary personal income tax increase, while appropriations
across all funds declined by 1.7%. Revenue expectations for fiscal 2011
were revised upward in February and again in May, primarily due to
stronger personal income tax performance. Net of proposed supplemental
appropriations, prepayment of fiscal 2012 school construction fund debt
service, and lapses, the state projects an ending balance of $696
million, providing limited financial flexibility representing just over
2% of fiscal 2011 revenues.

Budgeted appropriations for fiscal 2012 are 1.2% above the
estimated fiscal 2011 level, though this percentage will increase
slightly once a supplemental appropriation for local aid is passed.
While spending across most departments is reduced, local education aid
grows by $832 million, inclusive of additional court mandated funding
for certain urban districts, and increased funds for property tax relief
and pay-go transportation capital funding are incorporated. Projected
revenue growth of $1.1 billion (4% above revised 2011 levels) and an
increase in the prior year surplus expectation provide an offset to the
loss of federal stimulus support ($879 million for fiscal 2011) and
revenue forgone due to $185 million in tax relief. The use of one-time
measures, inclusive of balance draws and expected debt restructuring, is
down from the prior year, though this figure excludes the statutorily
reduced pension contribution appropriated at only one-seventh of the
actuarially required contribution for fiscal 2012. While it is
encouraging that the state has been holding down spending growth,
structural balance has not been achieved and the continued deferral of
funding for the state’s significant long-term liabilities will
negatively impact pension funded ratios and pressure future budgets. The
state’s financial cushion at year end is expected to remain narrow at
approximately $640 million.

State employment growth during most of the last decade lagged the
national experience and remains weak. New Jersey’s non-farm employment
levels declined by 0.7% in 2008 and by 3.9% in 2009, levels consistent
with national declines, though the 2010 decline of 1% was slightly
higher than the 0.8% contraction seen nationally. New Jersey’s
employment remains weak, with June 2011 employment was 0.4% below June
2010 levels, comparing negatively to a U.S. gain of 0.9% for the same
period. State unemployment of 9.5% for June 2011 is above the national
level of 9.2% for the same month. New Jersey’s wealth levels are high,
with 2010 per capita personal income of $50,781 equaling 125% of the
national level, ranking third among the states. Personal income growth
in 2008 totaled only 68% of the national level, and the 2009 decline was
sharper than that experienced nationally. For 2010, the state’s personal
income growth of 2.6% lagged the 3% growth experienced nationwide.

New Jersey’s debt levels are high and ongoing capital demands for
school construction and transportation projects remain large. The debt
burden as of June 30, 2011 equaled 8% of 2010 personal income. Excluding
bonds issued for pension funding, outstanding debt as of June 30, 2011
totaled 7.5% of 2010 personal income. State residents approved in
November 2008 a constitutional amendment that requires voter approval
for future debt authorizations that do not carry a dedicated repayment
source, which limits growth in debt levels. As of June 30, 2010, the
state’s portion of pension liabilities, adjusted to reflect recent
pension reforms, was 65% funded on an aggregate basis, an improvement
from 56% before the reforms were implemented. System-wide funding levels
for the PERS and TPAF systems, using Fitch’s more conservative 7%
discount rate assumption are weak at 61% and 59%, respectively. While
pension and employee health benefit reforms have been implemented and
are expected to slow the growth in liabilities, the state’s plan to
phase in full funding of its annually required pension contributions
over a seven-year period in will likely reduce funding levels in the
near term and add stress to the state’s operating budget.

** Market News International Washington Bureau: 202-371-2121 **

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