Standard & Poor's Ratings Services said its ratings and outlooks on New Jersey (A/stable general obligation; A-minus/stable appropriation; and BBB/stable moral obligation) incorporate the effects of New Jersey's weak pension funding.
The state released fiscal 2014 pension valuations based on GASB 67. The updated disclosure indicates the pension funded levels for the combined plans declined to 44.1% and to 32.6%, when excluding local plans.
Although the funded ratio is materially lower than what was previously reported significantly lower than last year, the changed figures represent primarily the application of a lower blended discount rate as a result of the use of the new GASB accounting standards.
Regardless of how the liability is measured, the state's record of underfunding its annual contributions to the pension system is at the root of its deterioration. The new pension accounting standards shed further light on a problematic feature of New Jersey's credit profile.
New Jersey's indicative score actually correlates to a rating of A-plus, but weakness in its pension funding levels and contributions have resulted in S&P assigning a rating one notch below that.
On Aug. 14, the governor appointed members to a commission (New Jersey Pension and Health Benefit Study Commission) to provide recommendations on how to achieve sustainability of pension and health benefits in the state.
The commission published a report on Sept. 25, 2014, that laid out the magnitude of the problem and highlighted the historical issues that have contributed to the pension underfunding, but failed to provide any recommendations.
The state indicates it expects these recommendations in the near future and prior to the governor's fiscal 2016 budget message, which is in February 2015. The 2016 budget proposal will include the governor's plan to address the state's large and growing pension liability. The state's management of this liability, which is even larger than previously reported, is likely to determine future credit direction.
