S&P Turns Thumb Down On Christie Budgets, Downgrades Bond Rating

Mark J. Magyar | April 10, 2014 | Budget
Credit agency criticizes overstated revenue estimates, retiree liabilities, high debt, and one-shot gimmicks that add to future budget woes

Credit: NJTV
Senate Budget Committee Chairman Paul Sarlo (D-Bergen).
In a sharp blow to New Jersey’s shaky budget structure, Standard & Poor’s yesterday downgraded New Jersey’s bond rating for the second time in Gov. Chris Christie’s tenure, driving up future borrowing costs and dropping New Jersey from a AA tier rating to single-A tier status ahead of only bottom feeders Illinois and California.

S&P’s decision will limit the ability of Treasurer Andrew Sidamon-Eristoff to restructure state debt to create one-shot savings for future budgets and will drive up future borrowing costs as state officials begin to wrestle with how to come up with $8 billion over five years to pay for renewal of a Transportation Trust Fund emptied a year early by overborrowing and fiscal gimmicks.

Senate Budget Committee Chairman Paul Sarlo (D-Bergen) and his Assembly counterpart, Gary Schaer (D-Bergen), both said the S&P downgrade proves that the Christie administration’s cycle of overly optimistic revenue forecasts, one-shot nonrecurring revenues, and midyear budget shortfalls is crippling the state.

However, Christie spokesman Kevin Roberts asserted that S&P’s action today actually underscores what the governor has been saying since January — “the rising costs of pension, health benefits, and debt service challenge our long-term fiscal health and require further reforms” – presumably either by making current public employees pay more or retirees receive less.

S&P’s decision to downgrade New Jersey’s bond rating was not entirely unexpected. Both Moody’s Investors Service and Fitch Ratings Inc. have cut New Jersey’s credit outlook from “stable” to “negative” in recent months, and analysts for both agencies have warned that a credit downgrade is possible if the state does not shore up its precarious fiscal position.

John A. Sugden, the S&P credit analyst who monitors New Jersey’s finances, said “the downgrade reflects our view that despite a generally improving economic environment, the state
continues to operate with a sizeable structural imbalance and that measures used by the state to balance the budget will contribute to future budgetary pressures.”

Sugden noted that S&P has been warning for two years that “bullish revenue assumption and overreliance on untested or uncertain revenues” would lead to a midyear budget gap like the $786 million Fiscal Year 2014 shortfall that the Christie administration had to close last month.

To fill that budget gap, Sugden pointed out, the state was forced once again to rely on nonrecurring revenues, including a $93.7 million retroactive cut in the state’s pension payment and a refinancing of tobacco revenue bonds that provided a $92 million one-shot cash infusion for the current budget, but “is expected to reduce general fund revenues by approximately $50 million to $60 million a year starting in fiscal 2017,” according to S&P.

“Not only has the state’s reliance on one-time measures continued during a period of economic expansion, but the sources are becoming less conventional, such as changes to retroactive pension contributions and monetization of future year’s revenues,” S&P noted.

Dropping a Grade

In explaining the decision to lower New Jersey’s credit rating from AA- to A+ — a rating higher than only California’s A and Illinois’s A- among the 50 states — Sugden’s analysis specifically cited a “trend of structurally unbalanced budgets that include only partial funding of pension obligations and the reliance on one-time measures that are contributing to additional pressure on future budgets; a large and growing unfunded pension liability; significant postemployment benefit obligations; and an above-average debt burden.”

S&P said these long-term fiscal issues more than offset New Jersey’s credit strengths, including a “diverse economic base, which is showing signs of improvement, but has a long way to go to full recovery,” and the state’s “high wealth and incomes, which are still among the highest of the 50 states.”

The ratings agency expressed concern over both the current FY2014 budget and the upcoming FY2015 budget. “Currently, the state’s reserves are estimated at $301 million, or less than 1 percent of revenues, which provides limited cushion should April revenues fall below their targets,” Sugden’s analysis noted.

S&P also noted that the nonpartisan Office of Legislative Services is projecting that state revenues will come up short by a combined $526 million shortfall in FY2014 and FY2015.

However, Sugden made it clear that S&P’s decision to lower New Jersey’s credit rating was based primarily on the state’s failure to address long-term issues in the hope that the five-year bull market will continue, as well as its reliance on increasingly unconventional budget maneuvers to close current shortfalls that exacerbate future budget problems.

“While our outlook on the national economy remains positive, we recognize that the current expansion will have reached its fifth year at the time of budget enactment and that a bull market in equities has
already surpassed the five-year point,” S&P warned.

A stock market downturn would hit New Jersey harder than most states because 40 percent of its income tax revenue is paid by the wealthiest 1 percent of residents, so state income tax receipts rise and fall with Wall Street, both Treasury and OLS budget analysts agree.

“By using bullish assumptions about revenue growth and one-time measures to close budget gaps, the state defers making long-term structural changes to better align revenues and expenditures, defers budgetary pressures to future years’ budgets, and increases its exposure to an eventual economic downturn,” S&P said.

“This is evidenced by the state’s continuous use of debt restructuring which, while artificially lowering current-year debt payments to make them affordable also gradually increases future year’s payments, demanding even greater revenue growth or continued restructurings to manage its debt burden,” S&P concluded.

Sarlo, the Senate Budget Committee chairman, said S&P’s report “confirms what we have been saying all along. This administration has repeatedly used overly-ambitious revenue projections in its budget proposals, despite the state’s sluggish economic recovery. And when those revenues failed to materialize, the administration has resorted to one-time measures to close the gap.


Schaer, the Assembly budget chairman, seized upon S&P’s credit downgrade as a warning that New Jersey can no longer afford to push off fiscal problems to future budget years.

“For five years, we in the Legislature have been handed budgets that have been constructed on unstable groundwork: with over-estimated revenue projections backed by one-shot funding sources that attempted to paper over ever-growing budgetary holes,” Schaer asserted. “And for five years, we have seen budgets enacted that mortgage our future to finance the present.

“Now, we are seeing major credit-rating agencies take note of these facts. The S&P credit downgrade, in no uncertain terms, tells us that the state’s fiscal can has become too heavy to kick down the road any further,” he said.

“If New Jersey is to ever climb out from under its mountain of debt, reverse our decaying credit rating, and join our neighbors in a sustained, vigorous economic recovery, then the governor and his administration needs to address the harsh budgetary realities staring New Jersey residents in the face and work together with legislative Democrats to address these issues,” Schaer continued.

Sarlo also urged the Christie administration to work with the budget committees “in a cooperative manner to provide full details on where the state stands financially, and how it reached its budget decisions. Only through an honest assessment of our fiscal circumstances can we ensure this cycle doesn’t continue.”

Roberts, Christie’s spokesman, noted that S&P’s decision to lower New Jersey’s credit ratings came “even with Gov. Christie’s historic bipartisan reforms to lower pension and health benefit costs and his commitment to make the two largest pension payments in history.”

He did not mention that the pension legislation was sponsored by Senate President Stephen Sweeney (D-Gloucester) and passed with bipartisan support, as Christie has told audiences nationwide.

“In light of the negative effect of S&P’s action on New Jersey taxpayers, it’s time for the Legislature to come to terms with the reality of the problem and commit themselves to further reforms,” Roberts concluded, presumably beginning with the passage of additional legislation to lower future pension and retiree health benefits.