New Jersey's bond rating was downgraded to AA-, the fourth-highest level, from AA by Standard & Poor's, which cited the state's growing pension and health- care obligations.
“The clock is ticking away on a pension and benefit bomb that can damage the health of the finances of our state,” Governor Chris Christie, a first-term Republican, said at a town-hall meeting in Union City today . “If we don't show we're going to reform this system, it will cost New Jersey.”
New Jersey is among 46 U.S. states facing a combined $140 billion of budget deficits next fiscal year, according to the Washington-based Center on Budget and Policy Priorities. Pressure to fund retirements of public employees will continue to have a “negative impact” on state credit ratings, Moody's Investors Service said this month.
Christie, 48, has focused on slashing spending after pledging not to raise taxes on residents who pay the highest real-estate levies in the nation. He faces a budget gap of as much as $10.5 billion next year, more than a third of his current $29.4 billion spending plan, the nonpartisan Office of Legislative Services projected in July.
Pension Overhaul
The governor is urging the Democratic-controlled Legislature to approve his proposals aimed at reducing the cost of state pensions and benefits. His measures would reverse a 9 percent benefit increase approved in 2001, raise the retirement age and freeze annual cost-of-living increases.
“While New Jersey's bonds remain sound and respected investments, this downgrade highlights the real danger of failing to act swiftly on critical pension, health-benefit and fiscal reforms,” state Treasurer Andrew Sidamon-Eristoff said in a statement. “The financial markets can send no clearer signal that the Legislature needs to follow the governor's lead and act on the pension and benefit reforms he proposed last September –- legislation that is critical to reviving the economy and restoring the state's fiscal integrity.”
New Jersey's pension-funding deficit increased by $8.05 billion, or 18 percent, to $53.9 billion as of June as the state failed to make contributions. The state also faces an unfunded liability of $66.8 billion for providing medical care to retired public employees, the treasury department said in December.
Underfunded Systems
U.S. states and local governments face a $3.6 trillion gap between their pension assets and what they've promised retirees, according to a study by Robert Novy-Marx of the University of Rochester and Joshua Rauh at Northwestern University.
Christie skipped a $3 billion pension payment in the current fiscal year. He said this month he intends to restart payments into the system this year with a partial contribution of $512 million if lawmakers act on his overhaul plan.
"The Assembly is not about to be lectured by a governor whose budget policies have led to massive property tax hikes and a ballooning pension deficit,'' Assembly Majority Leader Joe Cryan, a Union Democrat, said in a statement. “It's time for this governor to be held accountable for his actions and stop blaming everyone else.”
Stable Outlook
The lowered rating applies to $2.6 billion in general- obligation debt, S&P said in the report. In conjunction, the firm cut its ranking to A+ from AA- on $27.8 billion in appropriation-backed debt and to A- from A on $2.5 billion in moral obligation debt.
S&P has a stable outlook on New Jersey's bonds, which it said reflect its view that the state “will continue to manage its structural budget imbalances proactively.”
New Jersey has to make some “meaningful progress” in moving toward full funding of its pension system, S&P analyst Jeff Panger said in a telephone interview.
“The first step is to stabilize,” Panger said. “That doesn't mean stabilizing is going to get them an upgrade. But they need to eliminate some of the pressures they're feeling from a budgetary standpoint by addressing the pension.”
Moody's cited the debt load and underfunding in cutting its rating outlook on New Jersey's credit to negative last year. The state's general obligation debt is rated Aa2 by Moody's Investors Service, the third-highest rating. In a September report, S&P said pension funding “remains a credit weakness.”
California Rating
S&P's downgrade is its first of a state since it cut California's rating in January 2010. Only California and Illinois have lower credit ratings than New Jersey. The downgrade makes New Jersey tied for third-lowest with Arizona, Kentucky, Louisiana and Michigan.
The downgrade “was not unexpected,” said Ed Reinoso, who manages $300 million as chief executive officer of Castleton Partners in New York. Across the entire muni market, “you should expect to see downgrades on almost everything this year,” he said.
Negative press on New Jersey finances had already pushed the state's yields wider than AA rated bonds, said Daniel Solender, who oversees $15 billion as head of municipal bonds at Jersey City-based
Lord Abbett & Co.
Market Priced
A seven-year New Jersey general obligation bond traded today at an average yield of 3.24 percent, about 5 basis points higher than a Bloomberg Fair Market Value index of AA- debt maturing in 2018. A basis point is 0.01 percentage point.
“Most of it is already priced into the market,” Solender said of the credit downgrade.
Christie said the downgrade indicated a loss of confidence in state finances and may increase future borrowing costs. The expense of benefits has outstripped the rate of contributions and New Jersey's ability to fund them, he said.
“We're $54 billion in debt, not just because contributions haven't been made by the state but because benefits are too rich,” Christie said. “I'm doing this because I want to save public pensions, not eliminate them.”
--Bloomberg News--
