New Jersey’s dead last ranking in a new analysis of state fiscal conditions underscores the deteriorating credit conditions facing the Garden State’s next governor.

The winner of this November’s governor’s election between Democrat Phil Murphy and Republican Lt. Gov. Kim Guadagno will inherit a state that incurred 11 bond rating downgrades under Gov. Chris Christie, stemming largely from a two-decade track record of underfunding pensions.

A report released this month by George Mason University’s Mercatus Center placed New Jersey 50th in a comparison of states based on cash flows, long-term budgeting and debt levels with even Illinois coming out ahead in the rankings despite being one step from a junk bond rating.

Phil Murphy, a Democrat, was elected New Jersey governor on Nov. 7, 2017.
Murphy for Governor

“New Jersey’s finances are even worse than Illinois',” said Guadagno, who was elected lieutenant governor on Christie’s Republican ticket in 2009 and 2013. “It speaks to the very real need for our next governor to come to the negotiating table in good faith to work out realistic solutions for the long-term challenges facing our state like pensions and health benefits rather than screaming and shouting at each other from opposite ends of the room.”

The Mercatus Center study, which was based on 2015 audited financial statements, found New Jersey’s per capita debt at $16,821 compared with the nationwide average of $4,272. Authors Olivia Gonzales and Eileen Norcross said New Jersey’s weak finances have been driven largely by liabilities that are “persistently large and growing.”

New Jersey’s unfunded pension obligations were 42% of residents’ income in 2015 and 57% when factoring in other post-employment benefits, according to the study. The state’s operating ratio was lowest nationally with revenues covering only 91% of expenses.

“They don’t have a lot of budget flexibility,” said Norcross. “Pensions are growing very steeply.”

The press office for Murphy did not respond to requests for comment. On his campaign website the former Goldman Sachs executive calls for boosting pension funding along with pushing for the state to divest from private equity and hedge funds to help increase investment returns.

“Generally, I think a Democratic governor will have legislative support to make some necessary fixes that will help stabilize our finances,” said Marc Pfeiffer, assistant director of Rutgers University’s Bloustein Local Government Research Center. Democrats have solid legislative majorities.

“The challenge is that he will need to do major work to get the public to understand that whatever actions he takes, be they revenue program modifications or enhancements, or program cost reductions,” Pfeiffer said.

Guadagno has advocated throughout her campaign using findings from a Pension and Health Benefit Study Commission appointed by Christie in 2015 as a starting point toward resolving the state’s liability challenges. The commission recommended freezing existing pension plans and shifting workers to cash balanced defined benefit plans.

“I’ve outlined a plan to cut spending through an audit of state government, fix pensions and health benefits and lower property taxes for middle class families so people can afford to stay and work in New Jersey,” said Guadagno in a statement. “If Phil Murphy is elected, there won’t be a needed check and balance on the state legislature to veto bad policies that will tax and spend this state into oblivion and push us off the fiscal cliff.”

New Jersey has the second lowest state bond ratings with the exception of Illinois. The state’s general obligation bonds are rated A3 by Moody’s Investors Service, A-minus by S&P Global Ratings and A by both Fitch Ratings and Kroll Bond Rating Agency.

“There are still a few more levers the state can pull, but you have to get to a point where the legislature and the governor can come to some agreement,” said Mark E. Paris, chief investment officer and head of municipals at Invesco. “We’re definitely cautious on New Jersey.”

New Jersey Department of Treasury spokesman Willem Rijksen said the Christie administration has taken steps to improve credit conditions since the 2015 fiscal year accounted for in the CAFR, notably new legislation signed into law this month that dedicates state lottery revenues toward pensions and immediately cuts obligations by $13.5 billion.

Rijksen stressed that Christie inherited a $13 billion, two-year deficit in 2010 along with long-term obligations resulting from borrowing and he has since signed eight balanced budgets with the latest 2018 spending plan at $2 billion less than 2008's under Gov. Jon Corzine. He added that the new budget has the state’s largest pension payment of $2.5 billion and total contributions under Christie of $8.8 billion are more than two and a half times the totals from every governor combined since 1995.

“Any metric citing FY2015 fails to account for the Administration’s most recent fiscal accomplishments which continue to move New Jersey toward a solid fiscal footing following decades of mismanagement by previous administrations,” said Rijksen. “The FY18 budget accommodates reasonable spending necessary to provide stability for New Jersey’s economy — and this is not reflected in the report.”

Rijksen added that Christie has also sought to tackle current and post-employment benefit obligations liabilities, but has not received support from the Democratic-controlled legislature.

The Republican governor has pushed for recommendations from a the New Jersey Pension and Health Benefit Study Commission that include utilizing roughly $2.2 billion in yearly health care savings toward covering pension costs, freezing pension benefits for current state employees and shifting public workers to a new cash balance defined benefit plan.

“Despite its other shortcomings, this report might be the necessary catalyst to spark health benefits reform,” said Rijksen.

Professor Ben Dworkin, director of the Rebovich Institute for New Jersey Politics at Rider University, said Murphy is likely on a path toward Trenton with a 27-point lead in the polls. Dworkin noted that if Murphy carries his lead through Election Day he will be challenged when introducing a fiscal 2019 budget proposal against demands for new spending by advocacy groups who felt neglected under Christie. He said increases on school funding alone could raise the budget by $2 billion.

“Improving New Jersey’s fiscal health cannot be accomplished in one year alone and no one expects it to be done quickly,” said Dworkin.

Murphy has called for enacting a millionaire’s tax and Dworkin said he might also try and bump the sales tax back up to 7% from 6.825%. Christie cut the sales tax last year in a deal with lawmakers to replenish the state’s Transportation Trust Fund for eight years at $2 billion annually through a gas tax hike of 23 cents a gallon.

“The legislature is very likely to remain in firm Democratic control, so a Murphy administration will not have to face automatic opposition to tough decisions it has to make,” said Dworkin. “However, Democratic control in Trenton does not mean a smooth sailing for the Murphy agenda, especially on tax and budgetary policy where there is a wide range of opinions, even among party leaders.”

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