Moody’s Investors Service Monday revised its outlook on New Jersey to negative from stable, citing such fiscal challenges as more than $32 billion of outstanding debt, a structural imbalance and an empty rainy-day fund.
“Through several administrations, the state has utilized non-recurring solutions to resolve budgetary gaps, leaving the state with a sizeable structural imbalance, one of the highest debt burdens, one of the lowest-funded pension ratios and one of the highest post-retirement health insurance liabilities in the country,” according to a Moody’s report.
“Now that the nation is in recession, the state, similar to some other comparably rated states, has depleted its general fund reserves (balances in the surplus revenue and long-term obligation and capital expenditure reserve) leaving the state with less financial flexibility in the event that tax receipts lag projections. While pressures from the national recession are affecting all states to a greater or lesser degree, it is anticipated that economic recovery in New Jersey will be at a slower pace than the nation as a whole, according to Moody’s Economy.com.”
The outlook change affects approximately $2.5 billion of general obligation bonds and $28.5 billion of state appropriation debt. Moody’s rates New Jersey Aa3. Standard & Poor’s and Fitch Ratings assign the state their AA and AA-minus ratings, respectively. Both agencies have stable outlooks for the credit.
Along with the revised outlook, Moody’s late Monday assigned its A1 rating to roughly $200 million of Series 2009BB school facilities construction bonds being issued by the New Jersey Economic Development Authority. The outlook is negative. The school facilities construction bonds are contract bonds in which the state pays for the debt service via annual appropriation from the general fund.
To help close a $8.25 billion shortfall for fiscal 2010, which began July 1, state officials cut spending by $4.5 billion and increased revenue from the personal income tax and other tax hikes to generate $1.3 billion of additional revenue.
Decreasing its pension contributions in fiscal 2009 and fiscal 2010 helped the state balance its budget, but adds to New Jersey’s pension woes. The state’s unfunded pension liability is $23 billion, according to Moody’s. New Jersey will allocate $100 million and $106 million towards its retirement costs in fiscal 2010 and fiscal 2009, respectively, down from an early plan to pay $1.1 billion during the two years. New Jersey allocated $1.1 billion for pension costs in fiscal 2008.
In addition, the state’s unfunded OPEB liability is $55.9 billion.
“Several key industries in the state, including financial services and pharmaceuticals, have been hard hit and are likely to be relatively slow in recovering,” Moody’s said. “The state’s longer-term credit will depend on how resilient the state’s economy proves to be, how the state plans to address its structural imbalance, how the state addresses its long-term liabilities, and how tight the state’s liquidity becomes.”
In response to the outlook change, New Jersey’s Treasury Department pointed to earlier actions of Gov. Jon Corzine’s administration that aimed to pay down outstanding debt and address retirement costs.
“While pension and health care liabilities remain long-term fiscal concerns for all states, this administration has contributed more cash to the pension system in the last three years than in the last 15 years combined and fully funds its annual health care cost responsibilities for active and retired employees,” Treasury spokesman Tom Bell wrote in an e-mail. “Prior to the global economic crisis, New Jersey was well-positioned to close its structural shortfall and pay down debt. Overall debt levels have remained flat for the past three years despite additional issuances for school construction and transportation needs. If not for the historic economic issues, the Corzine administration was on track to cut debt significantly.”
