For Gov. Chris Christie, who celebrated his 52nd birthday at a fund-raiser with Mitt Romney in East Brunswick yesterday, this has been a week to forget.
Yesterday, Standard & Poor followed Fitch Ratings, Inc. in cutting New Jersey’s bond rating for the third time in Christie’s governorship. S&P cited not only the governor’s $2.4 billion in pension cuts, overly optimistic revenue forecasts, and persistent budget shortfalls, but also “the lack of consensus among elected leaders on how to return to structural balance” – a direct slap at the 2016 GOP presidential hopeful’s claim that New Jersey can show Washington how to overcome partisan gridlock.
S&P’s announcement followed the Treasury Department’s disclosure Tuesday that the state’s revenue collections for the fiscal year that ended June 30 had come in not $1.3 billion short, but almost $1.6 billion in the red, creating an immediate hole in this year’s state budget that will require yet-to-be-disclosed spending cuts. Treasury’s revenue projections for this year did not account for the full impact of the wave of casino closures sweeping Atlantic City.
Christie called a closed-door summit Monday on how to save Atlantic City, but the meeting was quickly overshadowed by the news that Trump Entertainment Resorts would file for bankruptcy and that Trump Taj Mahal would most likely follow Atlantic Club, Revel, Showboat, and Trump Plaza in shutting down. Closure of the city’s first $1 billion casino would push total casino layoffs this year over 10,000, further crippling the region’s economy and further stalling New Jersey’s sluggish economic recovery, which has trailed neighboring states.
Christie proclaimed confidence in Atlantic City’s future Monday and dismissed the bond rating agencies as “bums” who “get paid to give opinions” and are being “significantly overaggressive” now to make up for their “inaccurate” prerecession economic assessments. Christie’s assault on the integrity of the bond-rating agencies recalled his previous public attacks on David Rosen, budget director for the nonpartisan Office of Legislative Services, as a “tool” of the Democrats.
Christie’s protests are unlikely to carry weight on Wall Street, however. The credit downgrades by Fitch Ratings last week and S&P yesterday — with Moody’s expected to quickly follow suit — dropped New Jersey’s bond rating lower than any state except Illinois, and are expected to add millions of dollars to the state’s future borrowing costs. Debt service already eats up $3.312 billion — or 10.2 percent — of this year’s budget and is likely to keep growing even with interest rates still at historically low levels.
New Jersey continues to rely almost entirely on borrowing to finance transportation construction projects. The state is expected to issue $1.016 billion in Transportation Trust Fund bonds, and will need special legislation to borrow the same amount the following year because overborrowing in past years has eaten up all but $626.8 million of the state’s TTF bonding capacity for Fiscal Year 2016. It was the state’s announcement that it was seeking to issue $203,355,000 in higher education bonds Tuesday that triggered the S&P downgrade.
“The downgrade reflects our view that New Jersey will face increased long-term pressures in managing its long-term liabilities and that the revenue and expenditure misalignment will grow based on reduced funding of the state’s unfunded actuarial accrued liability,” John Sugden, senior director of S&P’s State and Local Government Group, said in a statement that directly tied the downgrade to Christie’s decision to cut $2.4 billion in scheduled pension payments in order to balance his FY14 and FY15 budgets.
S&P took a pessimistic view of Christie’s reliance on the Pension and Health Benefit Study Commission he appointed in August to achieve a solution to how to cover the state’s $90 billion in unfunded pension and retiree health benefit liabilities.
“The governor vetoed the legislature’s proposals to increase taxes to continue to fund pensions; therefore, it is likely that any pension reform proposals will be primarily focused on changes to retirement and health benefits, rather than on increased funding,” S&P noted. “In the absence of consensus between the legislative and executive branches, any type of pension solution is likely to be delayed and result in mounting financial pressures for the state in the long term.”
Senate President Stephen Sweeney (D-Gloucester) and other Democratic leaders have ruled out asking public employees to pay more toward their pensions and health benefits in the wake of Christie’s refusal to keep his pledge to put $1.6 billion into the pension system last year and $2.25 billion this year as part of a scheduled seven-year ramp-up to full actuarially required funding of the state’s pension system by FY18.
Christie cut the state’s pension payment to just $694 million last year and $681 million this year because of an unexpected plunge in state income tax collections last spring, and S&P expressed doubts about Christie’s indication in the bond prospectus that New Jersey would get back on schedule in FY16 with a $2.5 billion payment. “Revenues in fiscal 2016 would have to increase by approximately 5 percent from estimated revenues in fiscal 2015, just to fund the increased pension payment,” S&P noted.
And as the state’s bond prospectus indicated, New Jersey could have trouble just meeting its revenue projections for the current FY15 fiscal year.
Based on revenue collections through May 31, Treasury Department officials estimated that revenue collections would come in $1.3 billion lower than projected by the June 30 end of the fiscal year, marking the third year in a row that the administration had overestimated revenue collections, forcing a series of midyear budget cuts, raids on dedicated funds, and other “one-shot” budget maneuvers.
However, Treasury Department officials acknowledged publicly for the first time in the bond prospectus that state revenues came in another $274.9 million short in the month of June, largely on the basis of a $208 million shortfall in corporate business tax collections, a $26.3 million drop in transfer-inheritance tax receipts, and a $16.8 million drop in projected casino revenues.
The bond prospectus noted that “there is the potential that increased usage of recently-granted business tax incentives will limit the growth of Corporate Business Tax collections” in the future, casting doubt on the 6.5 percent growth rate in corporate business tax collections originally projected for the FY15 budget.
The $274.9 million shortfall came painfully close to eating up the Christie administration’s $300 million surplus heading into the FY15 fiscal year on July 1, although state fiscal experts said the administration would most likely cover most, if not all, of the shortfall by making yet-to-be-announced spending cuts in the $32 billion state budget. The administration was forced to borrow $2.7 billion in July — a higher amount than usual — to cover short-term cash-flow problems.
The latest end-of-year shortfall, however, raised additional questions about whether the state will soon face yet another mid-year budget crisis, and the recent closures of the Revel and Showboat casinos, the planned closure of Trump Plaza later this month, and the threatened closure of Trump Taj Mahal in November will only add to the state’s budget problems.
The state budget actually anticipates an increase in casino revenues from $229.7 million in FY14 to $270.2 million this year, largely on the basis of an expected increase in Internet gaming revenues that so far has fallen far short of expectations. The Treasury Department acknowledged in its bond prospectus that it did not consider the expected Showboat, Revel and Trump Plaza closures and the recently announced Taj Mahal shutdown in its casino revenue projections, and noted simply that the closures “may impact the growth of casino revenues.”
Economists and state budget officials are divided in their initial assessment of the impact of the five casino closures. While state officials are optimistic that the $2.6 billion in annual casino revenue – down from more than $5 billion in 2006 — will simply be split among the seven or eight surviving casinos. But casino analysts expect New Jersey’s gaming share to continue to shrink to $2 billion, and the closures could hasten that slide by turning the city’s Boardwalk casino strip into a depressing landscape of blacked-out casinos or empty lots if casino owners decide to tear down the abandoned properties to lower their property tax bills.
James Hughes, dean of Rutgers University’s Edward J. Bloustein School of Planning and Public Policy, said the job losses — which could top 10,000 if Trump Taj Mahal follows the other four casinos in closing its doors — are significant for a state that struggles to add 4,000 jobs statewide in a good month.
The economic spinoff will hit businesses throughout the state that supply the casinos that are closing, will hurt local stores and businesses that rely on casino workers as customers, and could drive down home prices and drive up foreclosure rates in the region.
“The Atlantic City region is going to be hit very hard,” Hughes noted. “It’s still a highly seasonal economy, and the unemployment rate is already higher than the state average. A lot of the dealers and upper-level personnel have skills that will be valuable to the new casinos in Pennsylvania and New York, but they will have to move. The real impact is going to be on the people who change the sheets on the beds, who are going to have a hard time finding work.”
Maria Elena Foster, a former Painters Union shop steward at the closed Revel casino who is now working as a community organizer for the union, agreed.
“People who were laid off from Hilton (the closed Atlantic Club casino) are still having a hard time finding work eight months later,” Foster pointed out. “A lot of the jobs that are available are $8-hour jobs with no benefits, and many of the workers who were laid off live in Atlantic City and rely on public transportation to get to work. They have nowhere to go, and their numbers are growing.”