Strike 3! Moody’s Joins S&P, Fitch In Downgrading NJ Debt

Mark J. Magyar | May 14, 2014 | Budget
Bond-rating agency cites recurring revenue shortfalls, lagging economy, pension burden, and overreliance on ‘one-shot’ revenues

Former State Treasurer Andrew Sidamon-Eristoff
It took just 33 days and yet another revenue shortfall for all three major bond-rating agencies to lower New Jersey’s credit rating to single-A status, joining Illinois and California at the bottom of the 50-state fiscal heap.

Moody’s Investors Service, which warned two weeks ago that it would be keeping a close eye on how New Jersey closed its latest budget gap, yesterday decided not to wait for Gov. Chris Christie’s latest budget solutions, and joined Standard & Poor’s and Fitch Ratings, Inc., in cutting the state’s credit rating.

Moody’s made its decision exactly two weeks after Treasurer Andrew Sidamon-Eristoff announced that the state was facing an $807 million budget gap. The latest current-year deficit will create an additional $600 million to $1 billion hole in next year’s budget, and it comes just two months after Sidamon-Eristoff had to employ a series of controversial budget maneuvers to close an earlier $694 million gap.

“The downgrade to A1 reflects the weakened financial position resulting from recurring revenue shortfalls and ongoing reliance on nonrecurring resources that have deferred structural imbalances into future years,” Moody’s said in a report issued by Baye Larsen, the Moody’s vice president and senior analyst who tracks New Jersey’s finances.

The downgrades by the credit-rating agencies, which apply to $32.2 billion in outstanding state debt, will raise future borrowing costs as state treasury officials prepare to spend the summer developing a new five-year, $8 billion Transportation Trust Fund refinancing plan that is likely to again rely heavily on borrowing.
Moody’s, like S&P and Fitch, continues to classify New Jersey’s financial outlook as “negative.”

“The negative outlook reflects the expectation that New Jersey’s structural imbalance will increase for the fiscal 2015 budget, and that budget solutions will be increasingly difficult,” Moody’s said. “With the ongoing pressure of statutorily scheduled pension contribution increases and lagging economic performance, the state will be challenged to improve its weak liquidity position.”

The Moody’s downgrade came just eight days before Sidamon-Eristoff is scheduled to present his proposed solutions for both the Fiscal Year 2014 and 2015 budgets to the Assembly Budget Committee.

With just six weeks remaining before the close of the fiscal year, Christie has said there is “nothing off the table,” including such controversial one-shot budget maneuvers as pushing off a sizable chunk of the $1.558 billion pension payment, which is required to be paid by June 30, into next year’s budget, or making school districts wait until July for the $400 million in school aid that is supposed to be paid out in late May.

While New Jersey is a high-income state with a diversified economy, Moody’s said it faces significant fiscal challenges, including three consecutive years of revenue shortfalls and inadequate reserves to cope with the budget crises those shortfalls create.

The state’s structural imbalance is exacerbated by growing pension and retiree health benefit costs, and the “gradual approach” taken in New Jersey’s seven-year phase-in of pension and retiree health benefit reforms will continue to increase the state’s unfunded liabilities until actuarially required funding of the state’s pension system is reached in FY18.

The state’s FY18 pension payment is projected at a whopping $4.8 billion, however, and Christie has warned that New Jersey cannot afford to continue to set aside 94 percent in projected annual revenue growth just to cover soaring pension, retiree health costs, and debt servicing.