New Jersey’s financial reputation took another hit yesterday, with S&P Global, one of the Big 3 Wall Street credit-rating agencies, announcing it has once again lowered the state’s debt grade by one step.
The downgrade is another setback for Gov. Chris Christie, a Republican who has now suffered through more credit-rating reductions than any New Jersey governor — despite emphasizing fiscal reform since taking office in early 2010.
The specific issues raised by S&P — including concerns about public-employee pension funding and the potential impact of a package of new tax cuts that Christie and Democratic legislative leaders agreed to enact last month — also show that New Jersey’s financial problems will remain a formidable challenge as the state gets ready to elect a new governor next year.
Officials from the state Department of Treasury yesterday reacted to the credit-rating downgrade by saying it emphasizes the need to enact new reforms to lessen the cost of funding public-employee pensions and health benefits. But several Democrats instead pinned the blame for the downgrade directly on Christie’s own decision making. And Senate President Stephen Sweeney (D-Gloucester) seized on the announcement to call for support for new legislation that would require the state to begin making pension payments on a quarterly basis, something Christie has previously opposed.
The downgrade is S&P’s fourth for New Jersey during Christie’s tenure, and it leaves the state’s credit rating at “A-.” Though still an investment-grade rating, New Jersey has the second-worst debt grade among states, behind only Illinois. Fitch Ratings and Moody’s Investors Service have also previously lowered New Jersey’s debt grade by three steps, leaving Christie with a record of 10 downgrade announcements during his time in office.
The latest S&P downgrade highlighted a series of problems that have been raised by the rating agencies before, including the state’s grossly underfunded pension system, which is nearly $44 billion in debt. Christie had sought to address the pension-funding issue in a major 2011 reform law, but a few years later he went back on a promise to increase state payments as his administration struggled with a $1 billion revenue shortfall. The 2011 law also forced workers to contribute more toward their pensions, and Christie is now calling on Democratic legislative leaders to make new benefits cuts to address the pension-funding problem, something they’ve so far resisted.
The new S&P downgrade also sounds an alarm that New Jersey’s current fiscal year budget could be in trouble, noting “the possibility of significantly below-budgeted revenue growth.” Treasury reported last month that first-quarter revenue growth fell just short of 1 percent, which is far below the 3.6 percent growth target Christie has set for the full fiscal year.
The S&P notice also raised questions about the package of tax cuts that Christie and lawmakers agreed to enact last month, including a phase-out of the estate tax and a phased-in reduction of the general sales tax. The cuts, which will eventually take a projected $1.3 billion in revenue out of the budget, were part of a broader deal to renew the state Transportation Trust Fund that also included a 23-cent hike of New Jersey’s gas tax that went into effect earlier this month.
But even though the gas-tax increase is expected to generate more than $1 billion in new revenue each year, New Jersey voters passed a constitutional amendment last week dedicating that revenue to the off-budget TTF. Meanwhile, the projected loss of revenue from the tax cuts as they are fully phased in will hit at the same time payments into the pension system are supposed to be ramping up to the full amount calculated by actuaries, which is something the state hasn’t been able to do for two decades.
“We base the downgrade on our expectation that state budget pressures will intensify in future years,” S&P analyst David Hitchcock said in yesterday’s announcement. “Recent events have added incremental out-year budget pressure, in our opinion, to what is already a sizable structural budget imbalance driven primarily by pension underfunding.”
Treasury spokesman Willem Rijksen said the downgrade announcement “effectively amounts to another call for further pension and health-benefit reforms, which the governor repeatedly has said are necessary.”
Rijksen also defended Christie’s fiscal record in the face of the record number of downgrades experienced during his tenure, which will run through early 2018 assuming he doesn’t leave office early. The current budget calls for a $1.9 billion pension contribution, which would be a record payment, Rijksen said.
“The governor has signed seven consecutive balanced budgets that protect taxpayers and critical services through responsible management of state resources,” he said.
“Gov. Christie has only signed bills reforming pension benefits and has never increased them,” Rijksen said. “This stands in stark contrast to previous lawmakers and administrations, which routinely increased benefits for years.”
But Assembly Budget Committee Chairman Gary Schaer (D-Passaic) suggested the downgrade reflects poorly on Christie, saying it “is further proof of his continued inability to manage state finances and pursue fiscal prudence and integrity.”
“Gov. Christie has not corrected the state’s structural deficit, leading to sluggish economic growth and continued fiscal woes,” Schaer said.
A spokesman for Phil Murphy, a Democrat and former U.S. ambassador to Germany who has announced he is running for governor in 2017, also pointed the finger directly at Christie, accusing him of “putting personal ambition first.”
“Phil recognizes that restoring New Jersey’s fiscal house will not be easy, but we cannot afford to kick the can any further,” said Derek Roseman, Murphy’s spokesman.
“Phil understands that only by getting our economy right, will we get New Jersey right,” he said. “These are problems that are created by a governor, and therefore can be reversed.”
Meanwhile, Sweeney, the Senate president, said he believes Christie could now be willing to back legislation seeking to improve the pension system’s funding by requiring the state to make contributions on a quarterly basis instead of all at once at the end of the fiscal year, which is the current practice. Christie has previously vetoed attempts by lawmakers to adopt quarterly payments as a pension reform, saying such a payment schedule is not compatible with the state’s tax-collection cycle, which relies heavily on April income-tax payments.
But Sweeney told reporters in the Statehouse yesterday that he’s made several tweaks in the newly introduced legislation that could win Christie’s support.
“I’ve been working with the governor and I’m very confident that once it passes in both houses that he’ll sign it,” Sweeney said. A copy of the new bill was not released yesterday.
Public-worker unions have supported quarterly payments in the past because they allow more investment income to be earned from the state’s pension contributions by getting the money into the professionally managed pension system sooner. Making quarterly payments would also protect the full pension payment from being used as a rainy day fund during the years when the budget comes up short of revenue projections, which has often been the case in New Jersey.
Quarterly payments were a key feature of a proposed pension-funding constitutional amendment that Sweeney had been backing for much of 2016. But he decided in August amid public-worker union protests not to put the issue before voters this year over concerns that it would not pass.
It’s unclear right now whether another attempt for a constitutional amendment will be made if legislation requiring the quarterly payments is eventually signed into law by Christie. Christie’s office could not be reached for comment yesterday after Sweeney announced he was reintroducing the quarterly payment legislation.
A statement released by Assembly Speaker Vince Prieto (D-Hudson) said the issue should have gone before the voters this year.
“As is always the case I’ll review any idea, especially one that the Assembly has already supported several times in the past,” Prieto said.