N.J. Tobacco Move May Prompt More Downgrades, Larkin Says

New Jersey’s move to raise $96 million by pledging tobacco-settlement revenue to investors may lead to additional downgrades after Standard & Poor’s cut the state’s rating this week, according to Herbert J. Sims & Co.

Governor Chris Christie’s administration has sacrificed $385 million over 10 years in a tobacco-bond refinancing for a one-time infusion to cover current expenses, according to an analysis by Richard Larkin, director of credit analysis at the Fairfield, Connecticut-based company.

“This complicated transaction to raise a paltry $96 million ranks with some of the worst gimmicks that used long-term bond funds to pay for annual expenses,” Larkin wrote in a note to investors. He said he has been following the state’s credit since December 1975.

New Jersey on March 7 reached a deal to raise cash by pledging the remainder of its revenue, from 2017 through 2023, from the national tobacco settlement to investors. The increased payment deal made prices on bonds linked to the 1998 compact with tobacco companies for health-care costs more than triple from March 3. New Jersey netted $91.6 million after issuance costs.

Budget Fixes

S&P cited the use of one-time measures such as the tobacco deal to plug budget deficits when it downgraded the state’s general-obligation debt on April 9 to A+, four levels below the top. The company said it may lower New Jersey further if revenue continues to miss Christie’s targets or the state keeps resorting to temporary budget fixes.

The ratings cut was S&P’s second since Christie, a 51-year-old Republican, took office in January 2010. Moody’s Investors Service and Fitch Ratings each cut the state one level in that period, and give it a negative outlook. Moody’s rates the state Aa3 and Fitch assigns it AA-, both three steps below the top.

“S&P was correct in downgrading the state’s G.O. rating for this fiscal chicanery; do not be surprised if Moody’s and Fitch follow suit,” Larkin wrote. “If these trends continue, New Jersey may soon share the honor of having BBB ratings like those once endured by California and Massachusetts.”

Neither Michael Drewniak nor Kevin Roberts, spokesmen for Christie, immediately responded to e-mailed requests for comment on Larkin’s note; nor did Christopher Santarelli or Joseph Perone, spokesmen for Treasurer Andrew Sidamon-Eristoff.

Santarelli defended the tobacco-bond deal in an e-mail last month after Democratic lawmakers criticized it as a budget stunt.

“This transaction is yet another example of this administration’s affirmative management of the state’s debt portfolio,” Santarelli said at the time. “In light of current market conditions, we believe we have an affirmative obligation to identify and pursue appropriate and often routine opportunities to realize debt service and other savings.”

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