Wall Street’s take on NJ budget positive but wary

Latest evaluation gives state good marks for paying down debt but raises concerns about increased spending
Credit: (AP Photo/Mark Lennihan)
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Over the last decade, a major recession and a global pandemic strained a state budget already saddled with significant debt and unfunded liabilities, and New Jersey’s bond rating fell to among the lowest of any U.S. state.

But a significant and unexpected tax-revenue windfall last month gave New Jersey a golden opportunity to get its budget back on track.

In the budget approved at the end of June, Gov. Phil Murphy and fellow Democrats who control both houses of the Legislature did a number of things to address some of the state’s long-standing fiscal challenges.

Addressing state’s fiscal issues

Those actions — including the establishment of a new debt-relief fund and the setting aside of enough revenue to cover a record-setting public-worker pension contribution in one lump sum — lifted hopes for a possible bond-rating upgrade, which officials in Connecticut celebrated recently.

Earlier this week, one of the major Wall Street credit-rating agencies issued a new evaluation of New Jersey’s bond rating in the wake of that new budget that did bring some good news.

Analysts from Moody’s Investors Service highlighted New Jersey’s “improved fiscal governance and management” as they decided to move the state’s bond outlook up one notch, from “stable” to “positive.”

“The revision to the positive outlook reflects the state’s better-than-expected financial position and improved governance profile that will enhance budget flexibility during the coronavirus recovery,” Moody’s said.

Analyst concerns over increased spending

However, the Moody’s analysts did not upgrade New Jersey’s bond rating. Instead, Moody’s left the rating for New Jersey’s general-obligation bonds at “A3,” which is several rungs below the triple-A debt grade the state once boasted years ago.

The 2022 fiscal year budget significantly increased year-over-year spending, in part by using surplus as a one-time source of revenue. That fuels concerns about how the state can sustain the increased spending on its pension funding,  K-12 education aid and on other programs in future years.

‘Increased spending on recurring programs in fiscal 2022 … (makes) the state vulnerable to budget risks in a period of continued uncertainty…’

“Increased spending on recurring programs in fiscal 2022, including education, creates structural budget gaps that make the state vulnerable to budget risks in a period of continued uncertainty and may challenge the state’s ability to sustain its improving trajectory,” Moody’s said.

While a bond-rating upgrade remained elusive for New Jersey, Murphy and state treasurer Elizabeth Maher Muoio issued statements that highlighted Moody’s decision to revise New Jersey’s credit outlook.

It’s the second such outlook adjustment to come from Moody’s this year, signaling to investors that New Jersey is trending in the right direction.

“For the past four years we have approached the fiscal challenges we inherited, not as obstacles, but as opportunities to right our fiscal ship,” Murphy said.

The administration’s handling of the state budget will “pay dividends for years to come,” added Maher Muoio.

Impact of bond ratings

A state’s bond rating can be a key factor in determining how cheap and easy it is to borrow money to fund long-term investments in schools and infrastructure like roads and bridges that cannot be paid for in a single budget.

Moreover, bond-rating downgrades, like those New Jersey suffered last year amid the initial economic turbulence caused by the coronavirus pandemic, can have political implications for a sitting governor like Murphy, who faces reelection in November.

New Jersey also suffered a series of bond-rating downgrades during the tenure of former Republican Gov. Chris Christie after the state experienced a slow recovery from the 2007-2009 Great Recession, and Democrats frequently pointed to these downgrades when questioning Christie’s handling of the state budget.

Conversely, bond-rating upgrades can give investors restored confidence to invest in states like New Jersey — and they can also deliver a huge boost to governors and lawmakers.

Connecticut’s bond-rating upgrade

Earlier this year, officials in nearby Connecticut heralded their state’s first general-obligation bond-rating upgrades in decades after Connecticut enjoyed its own sizable revenue uptick.

“We have made tremendous strides in just a few short years and the credit rating agencies are now taking notice,” boasted Gov. Ned Lamont, a Democrat, in a May news release.

New Jersey’s unexpected tax-revenue windfall and borrowing authorized by Murphy and lawmakers last year to support annual spending during the pandemic helped generate a projected $10 billion budget surplus this year at the end of June.

In response, Murphy and lawmakers established a new Debt Defeasance and Prevention Fund, and they also appropriated $3.7 billion to pay down existing debt and to fund new projects on a “pay-as-you-go” basis to obviate the need for more long-term borrowing.

Another $5.8 billion in the new budget was deposited into the public-worker pension fund in a lump sum earlier this month, marking the first time in over a decade that such a pension contribution was made at the start of a fiscal year instead of later, according to the Department of the Treasury.

Meanwhile, nearly $2.4 billion will also remain socked away in the state’s surplus, representing about 5% of total planned fiscal year 2022 spending of $46.4 billion, according to budget documents.

More work to do

Still, despite praising New Jersey’s “recent commitment to addressing more aggressively its liability burdens,” the latest Moody’s review also raised the concerns about the need to “restore structural budget balance,” making clear New Jersey still has work to do.

And with preparations for the next annual budget due to begin soon, the analysts listed for Murphy and lawmakers some of the actions or events that could trigger an upgrade of the state’s bond rating.

On that list was the “implementation of structurally balanced actions to close budget gaps” and an “articulated strategy for sustained full funding of pension contributions.”

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