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New Jersey Economy Still Short of What It Takes to Boost Bond Ratings

Unemployment is ticking down, tax revenue is on target, but sluggish economy and underfunded public-employee pension system still raise doubts -- not ratings -- on Wall St.

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Despite a string of positive economic news in the two months since Gov. Chris Christie signed the latest state budget into law, major Wall Street credit-rating agencies see no reason to elevate New Jersey’s low grade.

Instead, recent messages from the rating agencies suggest that New Jersey, which has the second-lowest debt rating of any U.S. state, shouldn’t expect to see its standing improve anytime soon. And the blame goes to longstanding fiscal issues that remain key trouble spots, including the underfunded public-employee pension system and a still-struggling state economy.

The credit rating is a key factor in determining how cheap and easy it is for states to get money from investors for long-term projects like new schools and bridges that cannot be funded in one single fiscal year. A good credit rating stretches taxpayer dollars, while a poor one can increase borrowing costs.

The rating is also a measuring stick that is used to evaluate how well governors are managing the state’s finances. And for Christie, a second-term Republican who’s preached fiscal discipline since taking office in early 2010, New Jersey’s low credit rating has been a major weakness as he now seeks the 2016 GOP presidential nomination.

All three major rating agencies have lowered New Jersey’s debt grade by three notches during Christie’s tenure, citing optimistic revenue forecasts, a sluggish state economy, and underfunding of the pension system as key factors.

And little changed when those rating agencies offered their latest evaluations of New Jersey’s creditworthiness earlier this month as the state prepared to sell or refinance more than $2 billion in bonds.

Only one agency, Fitch Ratings, offered a sign of hope, moving New Jersey’s credit outlook from “negative” to “stable.” Christie’s office immediately lauded the change in a statement, calling it a sign of the governor’s “continued progress in responsibly managing the state’s finances.”

But Fitch also saw no reason to move the state’s overall bond rating off of an “A” grade, its second-lowest rating for a U.S. state behind only Illinois. Standard & Poor’s also maintained New Jersey at an “A” rating in its evaluation and Moody’s Investors Service kept its A2 grade for New Jersey debt.

And those flat evaluations came even after New Jersey has enjoyed some promising economic developments in recent months, including an unemployment rate that dropped to 6.1 percent in June, and then to 5.9 percent last month. Though still higher than the national unemployment rate of 5.3 percent, New Jersey’s jobless average is now at its lowest point since 2008.

Another good development for state finances was the addition of a more than $600 million surplus cushion in the $33.8 billion budget Christie enacted for the fiscal year that began July 1. That is roughly double the amount that was carried into the 2015 fiscal year and puts the budget in a stronger position than years past to absorb unforeseen spending needs or drops in revenue.

And the latest state revenue report also brought good news, showing tax collections are on target for the current fiscal year and up $125 million over the same period last year.

“We expect to see revenue growth consistent with certified projections throughout the new fiscal year,” said acting state Treasurer Robert Romano. Fitch took note of those positive developments in explaining why it moved the state’s credit outlook in August to “stable,” saying the change “incorporates the recent signs of improved operating performance.”

But despite the progress on unemployment since July 1, Fitch also noted New Jersey’s overall economic recovery from the past recession continues to be a problem.

“The state has yet to regain the total number of jobs lost in the recession, with a 97.9 percent recovery rate as of June 2015 versus the nation at 102.5 percent,” Fitch said.

And Moody’s warned in its evaluation that even with an improved revenue outlook New Jersey is still struggling with overall structural budget imbalance. A key factor is the state’s record of contributing far less to the public-employee pension system than the amount actuaries say is needed on an annual basis to keep solvent a fund that covers an estimated 770,000 current and retired employees.

“The negative outlook reflects our expectation that the state's financial and leverage position will weaken further before structural balance is restored,” Moody’s said. “Without meaningful structural changes that improve the affordability of the state's liabilities, the state's structural imbalance will persist and/or pension liabilities will grow, and the state's rating will continue to fall.” The Moody’s evaluation also took note of the ongoing stalemate on what to do about the pension system going forward between Christie and Democrats who control the Legislature.

Christie earlier this year proposed a series of sweeping benefits changes, including freezing the current pension system and creating a new, less costly retirement plan with some features of a 401(k). But Democratic legislative leaders have instead come to the defense of public workers, saying they were already forced to sacrifice benefits in a 2011 bipartisan reform effort. The Democrats want the state to instead focus on finding ways to boost state-pension funding, with Senate President Stephen Sweeney (D-Gloucester) suggesting the federal government could come to the rescue.

Moody’s evaluation noted Christie’s latest reform proposal has “stalled” in the Legislature.

“We expect the structural imbalance to remain large in the medium term despite some stabilization in budget performance, economy, and liquidity,” Moody’s said.

And Standard & Poor’s made it clear that it would take real movement on the pension issue, either from reform or better funding, to push the state’s credit rating back up.

“A positive rating action or outlook revision would require the implementation of credible pension reform or a 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,” Standard & Poor’s said.

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