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Moody’s Expects New Jersey To Use ‘One-Shots’ To Fill Shortfall

The State University of New York’s Nelson A. Rockefeller Institute of Government warned seven weeks ago that the “disappearing temporary effects of the fiscal cliff” were the cause of anemic income tax collections in the fourth quarter of 2013 that were the weakest since 2010, and analysts cautioned that state governments might be facing a bitter April surprise.

With regard to New Jersey’s revenue estimates, Larsen said “we have commented on the three consecutive years of optimistic revenue assumptions that have resulted in midyear budget gaps, and those optimistic estimates are key components of the persistent budget challenges.” However, she added that “the reason behind the (current) revenue shortfall is less important than the actuality of it and how they respond to it.”

“We’re focused first on the impact on the FY14 budget, and given that there are only two months left in the fiscal year, there is very little time and very little of the budget left to adjust to this shortfall,” Larsen said. “This new shortfall is only 2.5 percent of the budget, but only 17 percent of the budget is left, so the shortfall is equivalent to almost 15 percent of the remaining appropriations.”

Larsen said it is Moody’s Investors Service’s “perspective is that it will be a significant challenge to balance the budget this late in the year, and that the specific actions they take will be very important in understanding how this reverberates in FY15.”

Any one-time revenues or nonrecurring budget savings used to make up this year’s $800 million shortfall would have to be matched by equivalent cuts in the FY15 budget. And that does not include the reductions that will have to be made in FY15 spending when Sidamon-Eristoff adjusts his $34.4 billion revenue projection for FY15 downward to reflect the fact that revenue collections for FY14 are now expected to total just $31.8 billion -- not the $32.6 billion he projected in February.

Moody’s and the other bond-rating agencies criticized the state’s decision to cut its surplus to less than 1 percent of state revenues in both its FY14 and FY15 budgets -- a problem that was underscored by the most recent budget shortfall.

“Given the state’s narrow liquidity and fund balance, there is very little to rely on to balance the shortfall,” Larsen said. “The state treasurer stated that he would not use any of the fund balance. Even if he did, it would cover less than half of the shortfall.”

Moody’s dropped New Jersey’s credit outlook from “stable” to “negative” in December, and those credit outlooks traditionally remain in place for 12 to 18 months, although Moody’s pays close attention to ongoing fiscal developments, Larsen said.

In its most recent report on the state, Moody’s listed four factors that could lead the bond-rating agency to lower New Jersey’s actual credit rating, as Standard and Poor’s did earlier this month. First would be the state’s “failure to restore liquidity position” by increasing the surplus, which was not contemplated in Christie’s original budget proposal and is less likely now that the state is facing such a large shortfall.

The second was “slower-than-projected revenue growth that increases budgetary pressure, particularly in light of rapidly growing pension” and retiree healthcare costs. The $800 million shortfall is due to slower-than-projected revenue growth -- even if other states made the same forecasting mistake -- and any reduction or deferral of scheduled pension payments would exacerbate future pension cost growth.

The third factor was “growing dependence on nonrecurring budget solutions,” a reliance that is likely to grow substantially as a result of the $800 million budget fix.

Finally, Moody’s cited “a return to economic stagnation or a significant increase in the state’s debt position.” New Jersey has yet to make up the jobs lost during the Great Recession, and the most recent unemployment statistics showed a spike in discouraged workers no longer looking for work. The state has overborrowed so heavily for the Transportation Trust Fund that the transportation capital fund will be a billion dollars short in FY16, Transportation Commissioner Jim Simpson confirmed at an Assembly Budget Committee hearing Monday.

“Everybody’s worried that the bond agencies are going to lower the credit rating again,” one Republican source acknowledged yesterday

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