NJ Among Most Vulnerable States if Recession Hits — Ratings Analysts

John Reitmeyer, Budget Reporter | September 24, 2018 | Budget
Moody’s, S&P fault Trenton’s reliance on last-minute scrambling for one-time sources of revenue, inadequate reserves, and absence of sustainable fiscal policies

If New Jersey’s budget gets rocked by the next economic recession, this time Wall Street analysts will be able to say, “We told you so.”

Separate, in-depth reviews released in recent days by two major credit-rating agencies place New Jersey among the states that are the most susceptible to the next downturn.

A key issue exposed by both S&P Global Ratings and Moody’s Analytics is the decision by New Jersey policymakers to maintain budget reserves that are just a small fraction of total spending, even as the overall economy has improved since the end of the Great Recession.

But the two financial analyses also suggest Trenton’s typical approach to budgeting, which involves scrambling to come up with one-time sources of revenue instead of adopting more sustainable fiscal policies, could be holding back economic growth. Another concern is the continuous shorting of New Jersey’s public-employee pension obligation since the Great Recession ended.

“Putting off pension payments is a recipe for long-term fiscal disaster,” the Moody’s report said.

Little in reserve if downturn occurs

New Jersey, like many other states, is heavily reliant on revenue generated from its income- and sales taxes, two tax sources that usually fluctuate along with the overall economy.

Maintaining a healthy amount of revenue in a reserve account is one way that a state can hedge against risk when tax collections falter, and earlier this year, Gov. Phil Murphy and lawmakers set aside a budget surplus of $765 million in the spending plan that was enacted for fiscal year 2019. While that represented a sizable increase compared to the reserves that were maintained for much of former Gov. Chris Christie’s tenure, Murphy and lawmakers also agreed to increase spending to over $37 billion this year, making the surplus cover just 2 percent of overall spending.

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By contrast, S&P notes that states with sustainable finances have been able to build up large reserves that “they can then draw upon in the subsequent downturn.” The S&P report goes on to group New Jersey among 15 states that are most exposed to the next recession.

Moody’s also places New Jersey at the bottom among states in its own “stress-testing” exercise; one of the issues that analysts highlight is the role that pension funding plays in the overall fiscal health of states.

Just as New Jersey was unable to build up robust budget reserves, the state has also fallen way behind on its obligations to the public-employee pension system. Murphy, a Democrat who took office earlier this year, worked with lawmakers to increase spending on education and mass transit, but funding for the pension system measures only 60 percent of the total that actuaries calculated was required for fiscal 2019 if it were to be properly funded.

Fateful decisions on pension plans

“Almost every state that is struggling today, from Illinois to Kentucky to New Jersey, can trace its problems back to decisions not to fully fund their pension plans,” the Moody’s report said.

Asked to respond to the issues raised by the Wall Street analysts, Department of Treasury spokeswoman Jennifer Sciortino said the Murphy administration is “acutely aware of these concerns.”

“This is why we fought throughout the budget process to build a healthier surplus and secure recurring revenue sources,” Sciortino said. “This is and will continue to be a priority for us moving forward.”

While some economists are concerned the nation’s ongoing recovery from the Great Recession could be on shaky ground, pointing to things like the narrowing yield curve on Treasury notes as a leading indicator, S&P notes that “economic growth has accelerated in 2018, reducing the likelihood of a recession within the next 12 months.”

Still, the latest unemployment figures also suggest there are some signs of concern for the New Jersey economy. While the state unemployment rate held steady at 4.2 percent in August, with the addition of 1,600 jobs, it still is higher than the U.S. jobless rate, which is at 3.9 percent. The figures from the state Department of Labor and Workforce Development also show the overall labor force has been reduced in recent years despite the ongoing recovery from the Great Recession.

Advised to get out of ‘emergency mode’

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The Moody’s analysts said states can “stay ahead of the curve” by making investments in things like education, infrastructure, and energy to keep their economies competitive. But they also issued a warning that should hit home in New Jersey, where there’s often a last-minute search for one-time revenue sources to stave off a deficit.

For example, this year’s budget is relying on some $200 million in revenue to be generated from a tax amnesty program that’s aimed at those who owe the state back taxes. But nonpartisan analysts from the Office of Legislative Services were unable to produce a reliable revenue estimate for the program and if it comes up short, lawmakers will have to scramble to fill the gap on an emergency basis.

“If state policymakers are constantly in emergency mode, moving from one crisis to the next, they will have neither the time nor resources to focus on the longer-term investments necessary to help their economies outcompete,” the Moody’s analysts said.