New Jersey Pension Ruling a Credit Negative: Moody's

A Feb. 23 New Jersey State Superior Court ruling saying pension contributions are contractually protected is a credit negative for the Garden State since it adds a further obstacle to cutting future employee benefits, adding more budget pressure, according to Moody's Investors Service.

The written decision from Judge Mary Jacobson requires New Jersey Gov. Chris Christie to increase the budgeted fiscal 2015 payment by $1.6 billion, to comply with the state's 2011 pension reform law. Christie, who is appealing the decision, vetoed a $1.57 billion payment from the state budget last June prompting a lawsuit from multiple public unions.

Moody's analyst Baye Larsen noted in a Feb. 26 report that if the $1.6 billion pension payment proceeds for the 2015 fiscal budget it would comprise nearly 15% of the unspent budget.

"Going forward, making the full pension contribution would incrementally improve the pension funding position, but would significantly increase budget pressure by reducing the state’s ability to fund other programs and potentially challenge the state’s liquidity," said Larsen. "The court ruling reinforces the protections of pension contributions and highlights how unaffordable the pension liability is in the current budget structure."

Christie presented a proposed $33.8 billion 2016 fiscal budget on Feb. 24 that would mark a 4.2% increase over the state's current spending plan with roughly 45% of the growth related to a $631 million increase to annual pension contributions. The $1.3 billion in pension payments would be only 3/10s of the state's actuarial requirement, according to Moody's. The budget proposal also does not incorporate any potential impact from the Superior Court ruling that came a day earlier.

Christie also announced during his budget address support for a new pension reform proposal published by the Pension and Health Benefit Study Commission, which would freeze the current defined benefit plans and shift active employees to a new cash balance defined benefit plan. The plan if adopted would also shift the costs of new teacher pension benefits to the local school districts, which are currently paid by the state. Christie is hoping to get legislative approval by August so that a constitutional amendment on the pension reform could go before voters on the November ballot and be implemented for the 2017 fiscal year.

”A key hurdle to generating legislative support for this reform proposal will be gaining the support of local governments and schools, whose costs could increase, and various unions, whose pension benefits would be reduced going forward," said Larsen. "In addition, the presence of the constitutional amendment sets an aggressive schedule to get legislative approval by August so as to get the amendment before voters in early November."