Moody’s Investors Service changed New Jersey’s credit outlook to negative from stable Wednesday evening, citing a structural deficit, the end of federal stimulus funds, and the state’s unfunded retirement costs.
Moody’s rates New Jersey’s $31.6 billion of outstanding general obligation and appropriation debt Aa2. The rating agency earlier this year recalibrated the state’s credit rating to Aa2 with a stable outlook from Aa3 with a negative outlook.
The outlook change is due, in part, to ongoing structural deficits. Gov. Chris Christie closed a nearly $11 billion fiscal 2011 budget gap by skipping a $3 billion payment to the state’s pension fund. The budget also reduced municipal and school aid and suspended property-tax rebates for most homeowners. Fiscal 2011 began July 1.
New Jersey’s Office of Legislative Services anticipates a $10.47 billion deficit for fiscal 2012. The state will not have the benefit of federal stimulus funds to help balance next year’s budget.
“The assignment of a negative outlook reflects our belief that the state will be challenged to fund its structural budget gap, particularly in light of its failure to fund pension contributions in the 2010 and 2011 budgets and the expiration of federal stimulus funding in fiscal 2012 as well as our expectation that New Jersey’s economic recovery will be slow,” according to a Moody’s report.
Beginning in fiscal 2012, the state will begin a seven-year ramp-up to full actuarially required contributions to its pension system. Lawmakers last year approved legislation that requires the state to gradually reach full ARC funding. Next year’s spending plan must include one-seventh of the state’s total pension obligation, or about $512 million, according to Senate Democrats.
While that will help tackle New Jersey’s $46.8 billion unfunded pension liability, it will place additional strain on the operating budget to meet those mandatory payments.
“This represents a significant budget pressure, as the fiscal 2011 ARC, at just over $3 billion, comprises nearly 11% of the state budget,” the report reads.
Conversely, the Christie administration last week unveiled pension and health care benefit reforms that aim to reduce state and local government expenses by increasing employee contributions, rolling back a 9% pension benefit increase, and boosting the retirement age to 65 from 55, among other changes. Moody’s described the plan as “aggressive” but added: “the status of the state’s pension funding is not projected to improve materially over the medium term.”
In response to the outlook change to negative, New Jersey Treasury Department spokesman Andrew Pratt said that the administration’s goal is to curb government spending and alter retirement and health care benefits to give the state and municipalities some relief from growing pension and health care costs.
“Gov. Christie is the first governor to propose addressing the other side of that equation, which is reigning in unaffordable benefits and payouts for local and state government employees,” Pratt said. “He’s also the first in many years to propose a number of other reforms that will help us bring the cost of our services and our government in line with what the taxpayers can afford.”
With widespread support from Democrats in the Legislature, Christie in late March signed into law pension and health care reforms that include requiring all state workers to contribute to their health care costs, restricting pension and health care benefits to new full-time employees, and limiting public-sector employees that hold multiple jobs to one pension plan, among other changes.
