A week after New Jersey’s credit rating was downgraded for the 10th time since the Governor took office, another Wall Street ratings agency said it was affirming its existing position on the state’s ability to pay back debt.
Fitch Ratings on Tuesday assigned a stable “A” rating to $300 million in New Jersey general obligation bonds, saying that it had already accounted for the state’s “history of structurally imbalanced financial operations, persistent underfunding of its liabilities, an elevated debt burden, and economic performance that has only recently begun to show positive momentum following the national recession that ended in 2009.”
Standards & Poors (S&P) downgraded New Jersey’s credit rating on November 14, dealing the Administration its 10th downgrade from a major ratings agency since he took office in 2010.
S&P Global Ratings now rates New Jersey’s general obligation bonds at A-minus, down from A, citing the state’s massive unfunded pension obligations and “weak” revenue growth — including anticipated revenue losses from sweeping tax cuts enacted as part of a deal to hike the gas tax to replenish the Transportation Trust Fund. The agency was not optimistic that things will get better soon.
“The outlook on all ratings is negative,” S&P said in a press release.
The state’s appropriation-backed debt was downgraded from A- to BBB+, its government departmental appropriation-backed debt to BBB from BBB+, and its state moral obligation debt to ‘BBB-‘ from ‘BBB’.
“We base the downgrade on our expectation that state budget pressures will intensify in future years,” said credit analyst David Hitchcock said. “Recent events have added incremental out-year budget pressure, in our opinion, to what is already a sizable structural budget imbalance driven primarily by pension underfunding.”
New Jersey in 2015 passed Illinois as having the worst pension funding in the nation, according to Bloomberg, with a $135.7 billion shortfall. P.L.2011, c.78 was supposed to shore up the pension system by requiring the state to ramp up its payments along with increased contributions from public workers. But while Christie has boasted of record contributions — $1.86 billion in the current budget — they still fall short of what the law required the state to pay.
S&P said, however, that regardless of the pension deficit, New Jersey’s revenue growth is being outpaced by other rising costs including other public worker benefits, Medicaid, education and debt service.
“An outlook revision to stable would require the implementation of credible pension reform or New Jersey’s demonstrated significant and sustainable funding commitment to the state’s pensions that, at a minimum, reverses the trend of growing liabilities and declining funded ratios,” S&P’s press release said.
Fitch Holds Firm
Fitch has also expressed similar concerns about the pensions system, but said it felt its existing rating incorporated those factors.
“The state’s credit strengths, such as its high wealth and a diverse economy, are offset by an evidenced lack of consensus on reforms to its chronic deferral of liability funding that has progressively diminished its operating flexibility,” Fitch said in its rating, prepared by senior director Marcy Block. “Although recent court decisions have affirmed the state’s legal authority to defer pension contributions, in the absence of reform Fitch expects that incremental pension contributions will consume the bulk of natural revenue growth for the next several years and remain a significant part of the state’s budget going forward.”
Quarterly Payments Could Help?
On November 21, lawmakers sent the Governor a bill that would require the state to make quarterly payments into the pension system, instead of annually. While the governor twice vetoed similar versions of the legislation, Democratic leaders said they expect him to sign this version, which passed with no opposition from Republicans and was drafted in consultation with the administration. Regardless of the legislation, the pension system will remain at risk of becoming insolvent within a decade if the state does not increase its contributions.
Fitch said the state was still a relatively safe investment, given its “broad economy and high wealth indices.”
“Although the population is slower growing than average, personal income is among the highest of the states and its economy benefits from its geographic position in the heart of the dynamic northeast corridor,” the rating says.