Financial strains caused by the COVID-19 pandemic drove a Fitch Rating downgrade to New Jersey’s general obligation bonds.
Fitch lowered New Jersey to A-minus from A Tuesday afternoon citing limitations to the state’s economic activity as it confronts a recession triggered by the coronavirus outbreak.
Fitch also revised its rating outlook to negative from stable. The downgrade affects roughly $1.6 billion of GO bonds outstanding.
All non-essential New Jersey businesses were closed on March 21 with Gov. Phil Murphy’s state-at-home order now extended until at least May 15.
The state has reported more than 4,700 COVID-19 deaths as of Tuesday afternoon.
“Despite progress made under the current administration, New Jersey's history of structurally imbalanced financial operations, as reflected in the persistent underfunding of liabilities, slim reserves and an elevated long-term liability burden, leave the state in a weak position to address the severity of the current downturn,” Fitch analyst Marcy Block wrote. “The lack of meaningful reserves necessitates a search for outside liquidity support and the scale of the estimated budgetary impact is significant, absent additional federal assistance.”
The downgrade puts Fitch's New Jersey rating on par with Moody’s Investors Service and S&P Global Ratings, which rate the state A3 and A-minus, respectively. Kroll Bond Rating Agency rates New Jersey bonds at A.
New Jersey was downgraded 11 times between 2011 and 2017 under former Gov. Chris Christie due mainly to an escalating pension burden.
Block noted that while New Jersey will likely see a jump in liabilities while tackling near-term economic headwinds, the increase would be “modest” with the state seeing a more noticeable hit in spending flexibility. Pension appropriations are at 70% of the actuarially determined contribution for the current 2020 fiscal year.
Murphy released a $40.9 billion proposed fiscal 2021 budget on Feb. 25, prior to the first U.S. death from COVID-19, that would have boosted pension payments by $729 million and brought the system to an 80% ADC funding level.
As the pandemic spread, the Democratic governor extended the start of the 2021 fiscal year by three months until Oct. 1 to allow the state to account for revenue adjustments. Block expects the final fiscal plan will “significantly differ” from the initial proposal.
Fitch noted that New Jersey’s liquidity position prior to the COVID-19 outbreak was improved from prior years following strong revenue growth and a $421 million deposit into the state’s Rainy Day Fund last year. The landscape soon changed however with cash balances through the end of March now projected to be insufficient toward supporting near-term expenditures because of revenue dips and the state’s tax filing deadline extended to July 15 from April 15.
“Fitch expects the direction of the state's credit quality to become clearer only after the immediate health crisis subsides and as the outlines of the recession and the effectiveness of the state's fiscal responses come into view,” Block said. “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 could lead to a downgrade.”
