After major Wall Street credit-rating agencies notified investors in recent weeks that New Jersey’s fiscal outlook is moving in a positive direction, Gov. Phil Murphy went on social and other media for a series of victory laps.
“We have momentum working in our favor,” declared Murphy in one news release issued earlier this month.
Elsewhere, he said it was proof the state was on the “path to full economic recovery.”
The recent outlook revisions from the rating agencies come on the heels of Murphy’s adoption of a new annual budget in late June that fully funded the state’s public-worker pension contribution for the first time in over two decades, and set aside billions to pay down state debt.
But despite the positive reviews of the state’s fiscal outlook, New Jersey’s bond rating itself was not upgraded, and the state still has the dubious honor of one of the lowest credit ratings of any state in the U.S.
Moreover, rating downgrades issued last year when the state’s fragile budget was upset by short-term revenue losses triggered by the coronavirus pandemic have left New Jersey’s debt grade lower today in the eyes of two of the top Wall Street rating agencies — Fitch Ratings and S&P Global Ratings — than when Murphy, a Democrat, took over from Republican Chris Christie in early 2018.
NJ once had an AAA bond rating
So even with many arrows now pointing in the right direction for New Jersey — and enthusiastic cheerleading of that recent development by Murphy, who is running for reelection — the state still has a long way to go to get anywhere near the AAA bond rating it boasted as recently as the early 1990s.
“I think the long-term concern is New Jersey managing its long-term liabilities,” Lisa Washburn, a former managing director at Moody’s Investors Service who now works for the independent research firm Municipal Market Analytics, said in an interview with NJ Spotlight News.
Its bond rating can be a key factor in determining how cheap and easy it is for a state to borrow money to fund long-term investments in schools and in infrastructure like roads and bridges that cannot be paid for in a single budget.
A strong bond rating can also lead to lower borrowing costs that ultimately get funded out of the state budget — good news for taxpayers. New Jersey’s current budget totals $46.4 billion after lawmakers approved a major spending hike in late June.
On the political side of the ledger, the bond rating can also have important implications since, for better or worse, it’s often viewed as a barometer of a governor’s mastery of state finances.
During Christie’s tenure, after the state suffered a series of credit-rating downgrades during its slow recovery from the 2007-2009 Great Recession, Democrats frequently pointed to these downgrades as they questioned Christie’s handling of the state budget.
So it’s no surprise that Murphy, given the significant budget challenges he inherited in 2018, has relished the recent string of outlook revisions.
One year ago, New Jersey’s outlook was much different.
The state had already suffered one credit-rating downgrade at the onset of the pandemic and had just “de-appropriated” about a $1 billion in spending to head off a major budget deficit.
The Murphy administration was also predicting steep revenue losses as the health crisis continued, and the potential for another round of federal pandemic aid coming to New Jersey was still uncertain.
But by the time the 2021 fiscal year ended this past June, New Jersey was already enjoying a remarkable turnaround.
Money poured in
Booming tax receipts helped produce a massive surplus and the state budget was also buoyed by more than $4 billion from a bond sale that was supposed to raise the revenue needed to offset the losses forecast by the Murphy administration, losses which ultimately never materialized.
New Jersey received more good news in May when more than $6 billion from the federal government came via the $1.9 trillion American Rescue Plan Act.
The recent notices from the rating agencies reflect some of these important developments.
“A solid economic rebound, state balancing actions during the pandemic and multiple rounds of federal assistance are now providing the state with both a solid financial cushion and extra capacity to accelerate progress on its high liabilities,” Fitch Ratings said earlier this month in its latest evaluation of New Jersey’s fiscal outlook.
Still, after a portion of the state’s massive surplus was spent down as part of the latest annual budget, S&P Global Ratings earlier this month flagged a “large structural deficit” totaling nearly 10% of budget appropriations. Moody’s, while praising the recent “acceleration of pension contributions,” also warned of “structural budget gaps” in its July notice to investors.
“Over the next 1-2 fiscal years, a key rating consideration will be continuation of governance and financial improvements that restore structural budget balance,” Moody’s said.
To be sure, the state’s penchant for spending more than it takes in from predictable and recurring revenue streams dates back over a decade, according to state-by-state research that is conducted regularly by The Pew Charitable Trusts. In fact, New Jersey ranked dead-last among the states in the “fiscal balance” category from 2004 to 2018, according to Pew.
“On the structural things that need to change, they haven’t seen much of a change,” Oroho said. “They see underlying here there’s still a structural deficit.”
A certified financial planner, Oroho also said he’s concerned that, with much of the state’s share of federal pandemic aid still unallocated, New Jersey could create a big fiscal cliff if it uses that money to create too many new programs that will eventually have to be funded with state tax dollars.
“If they start a new program, it’s going to be, ‘OK, how do we fund that program (going forward),” Oroho said.
In a commentary issued several months ago amid the adoption of the American Rescue Plan Act, Tom Kozlik, head of municipal strategy and credit at Hilltop Securities, predicted the allocation of billions of dollars in federal aid could produce a “golden age” for U.S. public finance. But he also cautioned that the federal aid “does not solve every problem.”
Structural changes deemed necessary
“Rescue Plan Act relief will temporarily help balance sheets, but only structural changes that last for multi-year periods will help correct the fiscal imbalances in places like New Jersey,” Kozlik said last week in an email to NJ Spotlight News.
For her part, state Treasurer Elizabeth Maher Muoio has taken pains to put the state’s recent fiscal progress in the context of the broader challenges posed by both the pandemic and the state’s legacy budget issues. And even with the lingering concerns about bonded debt and the sustainability of maintaining full pension payments, she highlighted other fiscal-policy improvements, such as an increased budget surplus and the trimming of public-worker health care costs.
“These steps will ensure New Jersey is on solid fiscal footing to tackle any future challenges that may come our way,” Muoio said in a recent news release.
Murphy spokesman Darryl Isherwood said the recent outlook revisions from the credit-rating agencies represent “just the first step,” and added “we are committed to deepening the work we’ve begun.”
“The Murphy administration has laid the groundwork for New Jersey to restore its financial foundation, in part by reducing our existing debt, pursuing significant health care savings, and honoring the commitment we’ve made to our workers by making the first full pension payment in 25 years,” Isherwood said.
“But after years of neglect, a once-in-a-century pandemic, and a vicious cycle of 11 credit rating downgrades experienced under the Christie administration, righting our fiscal ship will take time,” he said.