New Jersey suffered its first credit-rating downgrade in three years on Tuesday, as the coronavirus pandemic deals another blow to recent efforts to rehabilitate the state’s strained finances.
The downgrade announced by Fitch Ratings lowered New Jersey’s debt grade one notch, from “A” to “A-,” and also knocked the rating outlook from “stable” to “negative.”
Fitch’s analysts cited ongoing economic upheaval being caused by the pandemic, as well as some of the state’s longstanding fiscal problems, including a huge long-term pension liability and a “lack of meaningful reserves,” in its downgrade announcement.
Gov. Phil Murphy responded to the downgrade while answering questions from reporters during a coronavirus media briefing on Tuesday, saying “You never want to see a downgrade.” He also pointed to a long history of “fiscal mismanagement” that he said occurred under both political parties before he took office in early 2018.
“It is what it is,” Murphy said. “I’m not shocked by it by any means.”
Pumping up budget reserves
Murphy, a Democrat and former Goldman Sachs executive, has attempted to build up state budget reserves during his tenure. New Jersey also made its first deposit into the “rainy day” fund in over a decade at Murphy’s urging last year. Overall budget reserves were pushed to nearly $1.3 billion in the fiscal year 2020 budget, which totaled nearly $39 billion.
The governor has also been sticking to a gradual pension-funding ramp-up plan that was begun by his predecessor, Chris Christie, as part of the two-term Republican’s broader effort to address the state’s long-standing pension fund shortcomings.
But even with those recent efforts, New Jersey has remained among the states with the lowest level of reserves compared with overall spending. It has also continued to have one of the nation’s worst-funded state retirement plans, according to rating firms.
The downgrade announcement issued by Fitch on Tuesday took note of some “progress made under the current administration” and also pointed to the role that additional federal aid could play in helping the state navigate through the new budget challenges presented by the pandemic.
“Further timely and substantial federal action that offsets the likely deep economic and revenue declines the state will face over the next few months could support stabilization of the Outlook,” the announcement said.
Another downgrade in the offing?
But the Fitch analysts also pointed to circumstances that could lead to another downgrade, including “actions with long-term consequences that retreat on the significant progress the state has made in addressing its long-term liability position or weaken improved budgetary management practices.”
While credit-rating downgrades can be politically embarrassing for a sitting governor, they can also lead to higher borrowing costs that ultimately have to be covered by taxpayers when the state issues long-term bonds to finance capital projects and other expenditures that can’t be covered in a single fiscal year.
Prior to Tuesday’s downgrade, New Jersey was already just one step above a “B” debt grade under the rating scales used by both Moody’s Investors Service and S&P Global, two other major rating firms. Records maintained by the Department of Treasury indicate the state has never been downgraded to a “B” rating for general-obligation bonds at any point in its history by any of the top three rating agencies.
Moving into negative territory
Last week, Moody’s also lowered the state’s rating outlook from “stable” to “negative,” citing some of the same concerns that were highlighted on Tuesday by Fitch.
Murphy’s administration has yet to release a detailed projection of how deeply it expects the coronavirus pandemic to cut into the fiscal year 2020 budget, and tax collections remained ahead of projections through the end of March.
But the fiscal impact is expected to be significant, since New Jersey has been among the hardest-hit states, with only New York seeing more COVID-19 infections and fatalities. The Murphy administration has also ordered a series of aggressive social-distancing measures in response to the pandemic, including a closing of many businesses that have been deemed “nonessential” by the governor, which has slowed economic activity across many industries.
Among other steps the Murphy administration has taken in recent weeks in response to the pandemic has been a lengthening of the state fiscal “year” by three months, and the freezing of nearly $1 billion in fiscal 2020 spending. Murphy has also floated the idea that the state could attempt to use emergency-bonding authority to issue long-term debt to fill budget holes, even as others have suggested such borrowing may be unconstitutional and should be a last resort.
Murphy conceded on Tuesday that the downgrade from Fitch will “probably cost us a modest amount more, which I bemoan” when the state brings forward its next borrowing issue. He also pointed to New Jersey’s long-standing struggles with issues like budget reserves and pension funding as he reacted to the downgrade, and suggested the state was making good progress before the onset of the pandemic.
“We’ve entered this crisis with a fiscal peashooter given the decades — and by the way, both sides of the aisle — decades of fiscal mismanagement of this state, in one form or another,” Murphy said.
“I would love to have a stronger arsenal financially going into, not just our administration, but more importantly, into this crisis,” he said.