A new report from a major Wall Street credit-rating firm finds New Jersey still ranks at the bottom of the 50 states when it comes to being ready for the next recession even after recent attempts to boost its budget reserves.
While most states were ranked as at least moderately prepared for an economic downturn, only New Jersey and Illinois received the lowest-rung, “weaker” rating in the analysis issued yesterday by Moody’s Investors Service.
The firm’s findings didn’t lead to a change in New Jersey’s “A3” credit rating, but they are also not a ringing endorsement of the status quo and could serve as a wake-up call for lawmakers just weeks before they are due to send Gov. Phil Murphy a spending bill for the next fiscal year.
The response to the Moody’s report in Trenton yesterday was mixed. State Treasurer Elizabeth Maher Muoio suggested the findings bolster her recent calls for further boosting budget reserves and raising new revenue from a proposed millionaire’s tax. But Senate President Steve Sweeney (D-Gloucester), who recently introduced proposals for major public-worker benefits cuts, said they underscore his own calls for lowering spending.
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. One way that states hedge against volatility in tax collections is by maintaining budget reserves that can be tapped when a particular revenue source underperforms, or when a recession lowers the overall tax haul.
Little set aside for a rainy day
But New Jersey depleted its Surplus Revenue Fund — commonly referred to as the “rainy-day fund” — during the Great Recession and was unable to make a deposit over the last decade. And while the general budget surplus fund — a separate account that has less restrictions than the rainy day fund — fell to as low as $300 million in the wake of the recession, it has slowly been pushed back up to around $1 billion.
Stronger than expected revenue growth in fiscal year 2019 is allowing for the first deposit into the “rainy-day fund” in over a decade, Muoio announced last week. Murphy’s own budget proposal for FY2020 would also keep $1.1 billion in the separate budget-surplus account. But those combined reserves would still equal just a tiny fraction of overall spending, which will be nearly $39 billion in FY2020.
A recent analysis by The Pew Charitable Trusts found that as of FY2018, New Jersey’s improving reserves were only sufficient enough to cover about eight days’ worth of operating expenses. While several other states, including Illinois, ranked worse in the Pew analysis, New Jersey fell well below the 50-state median of 40.4 days.
Meanwhile, New Jersey also continues to have one of the worst-funded public-worker retirement plans of any state. Despite Murphy’s call for higher contributions, the state isn’t on course to make a full pension contribution until FY2023 under the current ramp-up plan that’s been embraced by the governor and top legislative leaders. Murphy and Sweeney also remain at odds over how best to proceed, with Murphy backing the millionaire’s tax to raise more revenue and Sweeney calling for worker-benefits cuts, including the establishment of a new, hybrid pension system that would limit the defined benefits that could be earned by new employees, teachers included.
Pension funding and the health of budget reserves were two of four categories that Moody’s reviewed for its recession-preparedness analysis. The firm also evaluated each state based on revenue volatility and financial flexibility.
‘…they both show weakness’
A total of 22 states were rated by Moody’s as being in a “stronger” position to absorb revenue losses that would come with a recession, and 26 others received a “moderate” rating. But New Jersey was rated alongside Illinois in the lowest grouping after receiving the poorest rankings in both the budget reserves and pension categories.
“They both have low levels of reserves relative to the potential revenue decline in our recession scenario,” Moody’s said about New Jersey and Illinois. “In addition, they both show weakness in their pension risk scores.”
The report also noted that — due to its own rising debt and deficits — the federal government is now in a weaker position to help out states like New Jersey that struggled so much during the Great Recession. A “polarized political environment” could also get in the way of federal aid during the next downturn, Moody’s said.
Muoio pointed to the Moody’s findings in the statement she issued yesterday, suggesting they line up well with comments she made during budget committee hearings in Trenton last week when she urged lawmakers to back the proposed millionaire’s tax to bring in more revenue.
“Moody’s analysis confirms Treasury’s position that our need for sustainable revenues is real and pressing because our obligations will only continue to grow in the coming years,” Muoio said. “Savings, surplus, and sustainable revenues are the key to putting us on the path to fiscal stability.”
Sweeney says answer is to cut costs
But Sweeney countered that the state needs to “go into overdrive on cost-saving measures.”
“By its very nature, a recession reduces revenues, so revenue raisers are far less effective than reducing costs,” Sweeney said. “The best strategy for us in a recession is getting a jump on cost cuts, especially with ensuring our debt obligations.”
A spokeswoman for Assembly Speaker Craig Coughlin (D-Middlesex) said, “We continue to be mindful of the need to have a sufficient level of surplus in the State budget and those discussions will be an important part of the FY20 budget process.”