New Jersey's general obligation rating was cut to A-plus from AA-minus by Standard & Poor's, which cited the state's "sizable structural imbalance."
Simultaneously, S&P Wednesday cut the state's appropriation backed rating to A from A-minus, and its moral obligation rating to BBB-plus from A-minus. The outlook on all the ratings is stable. The downgrade affects $35 billion in debt, according to Janney Capital Markets.
The structural imbalance stems from the state's repeated use of nonrecurring measures to help balance the budget, S&P analyst John Sugden wrote. Also, the state has a large and growing unfunded pension liability.
Sugden predicts that non-recurring measures in the current fiscal year may end up between 5.5% and 6.3% of the budget. This would be an increase from their use for about 5.4% of the budget in the past fiscal year. "These figures would be about double if the state were fully funding its pension annual required contribution," Sugden said.
In effect, Sugden is saying that while revenues and expenditures will balance this year, it is because of revenues that will not continue in the future and because some expenses are being kicked down the road to become a greater problem in the future.
In addition, Sugden said New Jersey has significant and growing Other Post-employment Benefits costs, mainly to provide health insurance for employees and retirees.
Finally, Sugden said the state has an above-average debt burden.
Currently, the state is using 24% of its budget to pay for pensions, employee and retiree health care, and debt service. This is crowding out other services.
"Not only has the state's reliance on one-time measures continued during a period of economic expansion, but the sources are becoming less conventional, such as changes to retroactive pension contributions and monetization of future year's revenues," Sugden said. The state's failure to make long-term changes to address its budget problem increases its exposure to an economic downturn that will eventually come, he said.
New Jersey joins Illinois and California as states with ratings in the A category.
New Jersey is rated AA-minus by Fitch Ratings and Aa3 by Moody's Investor's Service. Both ratings agencies have negative outlooks on the ratings.
