Over the last several months, Gov. Chris Christie and lawmakers have worked together to increase funding in the annual budget for New Jersey’s troubled public-employee pension system and to make changes to the state’s pension-contribution schedule.
But those steps haven’t prevented yet another credit-rating downgrade, with Moody’s Investors Service announcing its latest cut of the state’s debt grade yesterday, a move that knocks New Jersey’s credit rating for general-obligation bonds down by one step to A3.
This is the fourth such reduction announced by Moody’s during Christie’s two terms in office, marking a new setback for the Republican governor, who has made repeated attempts to address the state’s chronically shaky finances since taking office in early 2010. New Jersey’s debt grade has also already been lowered on numerous occasions during Christie’s tenure by other major Wall Street rating agencies, including four times by S&P Global and three times by Fitch Ratings.
The latest rating action from Moody’s is also the first to occur since Christie put forward a $35.5 billion spending plan for the new fiscal year that begins in July, and it comes as lawmakers are holding a series of hearings to evaluate his budget proposal — which would increase spending by about $1 billion even while a series of new tax cuts are being phased.
It remains to be seen whether lawmakers will now push Christie to scale back the tax cuts or bump up a $2.5 billion pension payment that his budget proposal currently calls for. The $2.5 billion payment represents only half of the contribution that actuaries calculate the state should be making each year to help restore the $72 billion pension system to good health.
Call for drastic changes in benefits
Christie’s administration responded to the credit-rating downgrade yesterday by echoing his previous calls to make more drastic changes to public-employee benefits than those passed by lawmakers with bipartisan support in 2011.
Last year, Christie and Democratic legislative leaders agreed to increase funding for the pension system by more than $500 million in the budget that’s in place for the current fiscal year, and the total payment of $1.86 billion that’s scheduled to be made when the fiscal year closes at the end of June will set a record for pension funding in a single state budget. Christie also signed into law last year a bipartisan bill that calls for the annual pension contribution to be made in quarterly installments starting in fiscal 2018, a change that’s intended to shield the pension fund from midyear budget cuts while also maximizing profits from investments.
But yesterday’s announcement from Moody’s highlighted the pension system’s still significant unfunded liability — which has hit nearly $50 billion as of the latest official accounting — and the reality that the gap has continued to grow. The rating agency also sounded alarms about other lingering financial challenges, including the Christie administration’s continued reliance on only slim budget reserves and the impact that the package of phased-in tax cuts will have on the annual budget.
The package of tax cuts — including a reduction of the sales tax and a phasing out of the estate tax —will “reduce revenues by $1.1 billion by fiscal 2021 and strain the state’s ability to resolve its large structural imbalance in the near term,” Moody’s said yesterday.
The state’s sizable debt and “moderately growing economy” were also listed by Moody’s as factors that led to the downgrade, which can make it harder and more expensive for the state to borrow money for capital projects that can’t be funded in a single fiscal year.
‘…large long-term liabilities’
“The downgrade to A3 reflects the continued negative impact of significant pension underfunding, including growth in the state’s large long-term liabilities, a persistent structural imbalance, and weak fund balances,” Moody’s said.
The ratings downgrade was announced by Moody’s late yesterday afternoon, well after the governor held a news conference to announce the signing of legislation that appropriates an additional $400 million from New Jersey’s off-budget Transportation Trust Fund to pay for immediate improvements to the state’s road, bridge and mass-transit system. The new funding for infrastructure investment is being raised in part through a 23-cent gas-tax increase that Christie enacted last year in a deal with lawmakers that also produced the new tax cuts flagged by Moody’s.
Christie made his monthly appearance on NJ 101.5 FM radio last night, but he was not asked to comment on the Moody’s downgrade by host Eric Scott.
But a statement released by the state Department of Treasury yesterday in response to the downgrade pointed to the need for more pension reform in the wake of the 2011 effort, which hiked contribution rates for employees and also increased the retirement age. A commission of benefits experts that Christie impaneled in 2014 has called for freezing the current pension system and moving employees into a new retirement fund with some features of a 401(k) plan, but Democratic legislative leaders have thus far refused to advance any of the panel’s recommendations.
“The pension system must be reformed or it will fail and continue to damage the entire state budget,” the Treasury statement said.
Christie, in his budget address before lawmakers last month, also proposed using the profitable state lottery to help prop up the pension system, though no official policy outline that details how the change would work has been made public since his speech.
Still, Treasury pointed to the lottery proposal yesterday in response to the Moody’s downgrade, saying it is “but the latest example of (Christie’s) focus on the pension system dating back to his initial campaign for Governor.”