Fitch Affirms Hudson County Improv Auth New Jersey Solid Waste Sys Revs at 'BBB-'

In the course of routine surveillance, Fitch Ratings affirms the 'BBB-' rating on approximately $89.2 million Hudson County Improvement Authority (HCIA, or the authority), New Jersey outstanding solid waste revenue bonds series 1998 (the bonds), including the solid waste system revenue refunding bonds and the Koppers landfill site improvement bonds. The Rating Outlook is stable.

The 'BBB-' rating reflects the system's still sizable reserves available for debt service payments, and regulatory flow control that commits waste primarily to HCIA-contracted disposal sites. The most significant credit concerns are the system's heavy debt burden, weak legal provisions that incorporate reserves for rate covenant calculations, and the long-term viability of reserves should state aid decline or operating losses accelerate. Fitch expects the system to manage net operating revenues, through fee increases and/or expense control, to offset declines in tonnage and state aid, leading to a gradual drawdown of available reserves over the life of the bonds. Significant weakening of net operating revenues could lead to more rapid reserve level declines, and negative rating pressure.

Reserves in the authority's solid waste fund totaled $38.4 million at the end of fiscal 2007 (Dec. 31), down from $45.2 million at the end of fiscal 2005. An additional loss from operations of at least $1.5 million is anticipated in 2008, further lowering reserve levels. Reserves for 2007 equaled approximately 73% of total spending, down from 85% at the end of 2005. Debt service coverage, based on net operating revenues was 0.4 times (x) in 2007, down from 0.6x in 2005. Legal provisions are liberal, and debt service coverage when bolstered by the inclusion of reserve balances, was 5.6x in 2007, down from 6.9x in 2005. Fitch anticipated these declines, as the authority committed, several years ago, to subsidize tipping fees and debt service with reserves. Declines in tonnage received by authority-contracted disposal sites (down 10.5% between 2005 and 2008, based on HCIA projections for the current year) have added pressure on the authority's reserves.

The authority requests funds from the state annually, and while there is no legal requirement to provide payment or notice of non-payment of the state subsidy, the state has provided a subsidy since 2004. State support for all local solid waste systems in fiscal 2009 is budgeted at $30 million, representing a decline from fiscal 2008's budgeted amount of $35 million and a de minimis 0.1% of total state appropriations. The authority's subsidies declined to $4.5 million in 2007, from $7 million in 2005.

The long-term financial plan for the authority includes annual tipping fee increases, and the gradual drawdown of reserves over the life of the bonds. HCIA increased its tipping fees 3.5% in 2006 and 2008. Increases of at least that level are anticipated going forward, dependent on disposal volume, state aid levels, and HCIA's contracted disposal costs. The current contract expires in July 2009 and a new contract with expenses significantly different than historical rates would alter the authority's financial flexibility. The current rating and Outlook reflect this risk.

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