New Jersey Gov. Chris Christie's plan to cut the state's contribution to its pension system to make up for lower-than-anticipated revenue is a credit negative, according to Fitch Ratings.
The rating agency issued its report Wednesday, the day after Christie said the state would reduce the pension contribution by $884 million from the amount he'd previously promised in response to a $1.07 billion revenue shortfall in fiscal 2014, and by $1.57 billion in the next fiscal year. The governor announced he was taking the measures in order to maintain a constitutionally required balanced budget, Bloomberg News reported.
In 2011 the governor and legislators reached an agreement to ramp up contributions to the state's pension system over the course of seven years, ultimately to fully cover annual actuarial required contributions. The governor can make the change to current fiscal year funding by executive order. He will need the legislature's approval for next year's changes.
Fitch anticipated that the state would use a stop-gap solution to address the current fiscal year's budget gap, since the fiscal year ends in about six weeks, Fitch senior directors Marcy Block and Karen Krop wrote in a statement.
"However, the proposal to cut the pension payment for fiscal 2015 by $1.57 billion as the primary means to close the identified $1.75 billion budget gap for next year is particularly troubling," they wrote. The cut will make the state's long-term liability challenge even larger, they wrote.
The fact that the state is doing this in the midst of an economic recovery is of particular credit concern, they wrote.
"I have made the decision that we are not going to blindside our students," Christie said Tuesday, in explaining his decision to cut pension contributions. "We are not going to blindside our seniors, our higher education institutions or those who rely on the safety net the state provides to balance our budget with only six weeks left in the fiscal year."
On Wednesday New Jersey Treasurer Andrew Sidamon-Eristoff told the New Jersey Assembly Budget Committee that the Christie administration saw its pension funding as consisting of two parts - one to support the normal costs of future pensions of current employees and the other to support the inherited underfunded actuarial liability.
Sidamon-Eristoff said the government this year and next would just make contributions for the former part. He said the state planned to resume funding the latter part in fiscal year 2016. He affirmed that the state's government was responsible for its pension's underfunded actuarial liability.
On Wednesday Sidamon-Eristoff also reiterated Christie's position that the state must change its pension and other postemployment benefits to reduce the amount the government was responsible for.
During Wednesday's hearing Budget Committee chairman Gary Schaer likened Christie's approach to a decision not to pay an American Express bill. Sidamon-Eristoff denied the state was walking away from its long-term obligations.
"The problem I have with this budget is that there is no plan," Democrat Schaer said. "We seem to be going nowhere." The governor's executive spending decisions and proposed budget might get New Jersey government to the start of the new fiscal year on July 1 and beyond, he said, but it does not solve anything.
Schaer said the Republican governor seemed to be blaming his predecessors but that Christie had been in office for five years and it was time for him to take a "The buck stops with me," approach.
Sidamon-Eristoff said that many areas of New Jersey's budget were affected by judicial mandates or other commitments. This made making spending cuts difficult.
In the last two months all three ratings agencies have downgraded New Jersey's general obligation rating to A-plus or the equivalent.