More downgrades are in New Jersey's future as its liabilities continue to mount, according to Municipal Market Analytics.
MMA partner Matt Fabian wrote in a report Tuesday that the Garden State's structural imbalance remains large under the $35.5 billion budget proposal Gov. Chris Christie outlined last week. Fabian said that unfunded pensions and healthcare costs are now estimated at $160 billion, up from $144 billion last year.
"With its credit position continuing to weaken under the weight of its growing liabilities, future downgrades are increasingly likely for the state," Fabian wrote. "Even the impact of recent stock market gains on the funded status of the pension system are likely to be muted by its current underfunding and the failure of the state to adequately fund its annual actuarial contribution."
New Jersey has the second lowest bond rating of the 50 U.S. states at A-minus by S&P Global Ratings, A2 by Moody's Investors Service, A by Fitch Ratings and A by Kroll Bond Rating Agency. Only Illinois is lower.
MMA is projecting that the ratings gap between fiscally sound states and "pension-plagued" states like New Jersey, Illinois, Connecticut and Kentucky will soon become "even more pronounced".
Christie's budget request for pensions, other post-employment benefits and debt service accounts for nearly a quarter of the proposed spending plan and would rise to over 30% if the full actuarial pension contribution was made. The Republican governor's budget includes a $2.5 billion pension contribution that is a $647 million increase from this year, but only half of what is actuarially required.
Fabian noted that the increase in pension contributions for the 2018 fiscal year consumes 72% of the state's proposed $899 million increase in spending. This number rises to 82% when factoring in healthcare and debt service costs meaning that other state priorities like education funding, higher education and municipal aid will see little to no spending growth, according to Fabian.
In addition to the underfunding pensions by $2.5 billion, the proposed budget also relies on transfers of $204 million from the New Jersey Turnpike and $154 million from the Clean Energy Fund for general fund purposes. Fabian added that Christie's proposal to redirect lottery revenues to fund pensions is "unlikely" since it would lead to a gap of about $1 billion annually for general fund programs geared toward veterans, higher education and the developmentally disabled.
An additional credit concern in Christie's budget, according to Fabian, is an estimated $1 billion revenue increase, which will be challenged by late 2016 sales and income taxes that are being phased in this year. The cuts are having an impact with the state adjusting revenues down by $250 million for its updated fiscal 2017 forecast.
"Income tax receipts in April will provide additional insight into the prudence of this revenue estimate," said Fabian.
New Jersey's inability to build up reserves since the Great Recession ended nearly eight years ago is an added burden on the state's credit, according to Fabian.
Projected general fund reserves for 2018 are $492 million, accounting for 1.4% of spending.
"The lack of reserves means the state will likely have to make significant and disruptive adjustments to spending when the next economic contraction occurs to the detriment of services, aid to lower levels of government and/or pension funding," said Fabian.
