Overview

New Jersey counties and municipalities, whose credit quality has been largely stable even through the pandemic, benefit from generally strong local economies with above-average wealth and income levels and access to robust employment markets. The revenue mix is favorable with predominant reliance on resilient property taxes. These factors, and significant federal relief funds, will support credit quality in the medium term, in our view.

S&P Global Ratings maintains ratings on approximately 295 New Jersey local governments (LG). Overall, LG credit quality in the state remained stable despite a turbulent 2020, with only 3% experiencing rating movement during the 12 months preceding May 24, 2021. One issuer had a positive rating change and three had negative rating changes on their general obligation bonds. Additionally, our outlooks reflect the stability over the past year with 97% having a stable outlook, while 3% have negative and less than 1% positive outlook.

What We Are Watching In 2021 And Beyond

Federal and state policy changes are unusually likely to influence finances for New Jersey local governments over the next two years. Federal stimulus funding from the Coronavirus Aid, Relief, and Economic Security Act covered a broad range of pandemic-related expenses for 2020. Generous county and municipal aid in the American Rescue Plan will allow for revenue replacement and potentially allow for local units to fund important one-time expenses such as capital purchases or IT upgrades. However, as some local governments may implement new programs, including small business support, we will monitor if entities are able to align recurring revenues and expenditures following the stimulus programs' expiry. The 2017 federal elimination of the state and local tax deduction had a comparatively larger impact on New Jersey residents given the state's generally high tax rates, and we are following ongoing discussions around a potential repeal.

At the state level, the recent recreational marijuana legalization will increase state and local government revenue. The enacting legislation allows for municipalities to levy a local transfer tax, which is a gross receipts tax on all marijuana business. The positive financial effects of the law rely on the state and municipalities budgeting appropriately for related revenue. The state is also pursuing an aggressive expansion of offshore wind energy and has already secured agreements for large-scale construction. Included in this effort is the creation of new fabrication and assembly plants in the state. Finally, the governor's fiscal 2022 budget message included fully funding the state pension system's actuarially determined contribution for the first time in 25 years. Continued state funding progress could help constrain cost increases for local governments.

Spotlight On Environment, Social, Governance Factors

Several local governments, including some of the largest communities, have coastal exposure along the Eastern Seaboard. In 2012, Superstorm Sandy caused severe damage to several communities and disrupted the New York MSA economic engine. Although we view some portions of the state as having environmental risks above those of the sector, the risk could vary depending upon an entity's proximity to the coastline. However, inland flooding is also common, and many localities are performing stormwater management upgrades. Governance factors are an opportunity for New Jersey local governments, mainly reflecting the state's extraordinary support for municipalities under extreme fiscal or unusual distress. The Department of Community Affairs, through the division of local government services, administers the transitional aid to localities program for distressed municipalities. Recipient municipalities are required to submit to additional state oversight as well as implement cost controls and reforms that will reduce their reliance on this aid in the future.

However, the state's poor historic pension funding discipline and assumption choices could lead to elevated and volatile costs for local governments. In the short-term, our view of local government credit quality in New Jersey incorporates the health and safety social risks posed by the COVID-19 pandemic, especially for local governments with exposure to office space, nonlocal tourism, and air travel demand. Over the longer term, we view social risks for the state as being elevated because the state and surrounding region are disproportionately exposed to population shifts, affordability concerns, and an aging workforce.

For more information regarding New Jersey government ESG factors, see "ESG U.S. Public Finance Report Card: Tri-State Region Governments And Not-For-Profit Enterprises," published Oct. 28, 2020.

Although there is a relatively small portion of the population exposed to a subsequent storm surge equal to the magnitude of Superstorm Sandy's 13-foot surge (see chart 1), property value within these areas is substantial.

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New Jersey Local Government Data

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