A Moody’s Investors Service analysis saying New Jersey is poorly prepared for the next economic downturn underscores the need to boost reserves, according to State Treasurer Elizabeth Maher Muoio.
The Moody’s report released Monday showed that New Jersey and Illinois are the least prepared for the next U.S. recession based on revenue volatility, reserves coverage, financial flexibility and pension risk. The report was released less than a week after Muoio announced that Gov. Phil Murphy’s administration would be making the state’s first
“New Jersey has been punting on its responsibilities for far too long,” said Muoio in a statement responding to the Moody’s report. “While our projected surplus is certainly better than the far too risky position New Jersey had become accustomed to in recent years, we are still far behind most states when it comes to being adequately positioned to weather a future economic downturn.”
Moody’s analyst Emily Raimes noted that New Jersey and Illinois both have low reserve levels relative to the revenue declines they could see in a recession scenario coupled with high pension risks. New Jersey has added to its reserves recently to improve fiscal preparedness while Illinois has been developing a strategy to improve its pension funding and structural budget balance, according to Raimes.
“While current economic conditions are strong, states are aware that a downturn will come eventually and are building reserves to prepare,” said Raimes in a statement. “While most states have healthy reserves and inherently strong fiscal flexibility, Illinois and New Jersey both have low levels of reserves relative to the potential revenue decline in our recession scenario.”
Structurally imbalanced budgets and rising pension liabilities have contributed to New Jersey having the second-lowest general obligation bond ratings among U.S. states with only Illinois at a lower level. The Garden State’s debt is rated A3 by Moody’s, A-minus by S&P Global Ratings and A by Fitch Ratings and Kroll Bond Rating Agency.
Raimes cautioned that wide federal budget deficits and a “polarized political environment” means it is extra vital for states to boost their reserves. She noted that the federal government responded to the Great Recession of 2008 with a fiscal stimulus package, but Washington may not be positioned to provide similar support to states during the next downturn.
“Moody’s analysis confirms Treasury’s position that our need for sustainable revenues is real and pressing because our obligations will only continue to grow in the coming years. Savings, surplus, and sustainable revenues are the key to putting us on the path to fiscal stability.”
Muoio said last week that a $317 million deposit would be made into the state’s rainy day fund for the current 2019 fiscal year after a record-setting $3.627 billion of gross income tax receipts were received in April. The Garden State’s rainy day fund was at $734.7 million during the 2008 fiscal year but the entire balance was then drawn because of the economy collapsing. The treasury department is forecasting back-to-back surplus balances of over a billion dollars for 2019 and 2020, which is larger than recent years but still only 3% of New Jersey's total budget.
“Moody’s analysis confirms Treasury’s position that our need for sustainable revenues is real and pressing because our obligations will only continue to grow in the coming years,” Muoio said. “Savings, surplus, and sustainable revenues are the key to putting us on the path to fiscal stability.”
