Coronavirus-induced recession brings another negative outlook to New Jersey
Major fiscal pressures facing New Jersey from the COVID-19 pandemic prompted a negative outlook from S&P Global Ratings to the state’s $33.6 billion of outstanding bonded debt.
S&P revised New Jersey bonds to negative from stable Wednesday citing expected budget deficits while the state combats a coronavirus-driven recession. All non-essential New Jersey businesses were closed on March 21.
"State and local governments across the country are facing unprecedented budget challenges right now, which is why Governor Murphy continues to fight for direct federal assistance for New Jersey," New Jersey State Treasurer Elizabeth Maher Muoio said in a statement in response to the outlook change. "We also have a team of seasoned professionals focused on addressing our short-term liquidity issues and taking all the prudent steps necessary to navigate this difficult time while we wait to see how our revenue situation materializes."
S&P concurrently affirmed its A-minus rating on New Jersey general obligation debt. The Garden State’s GO bonds are rated A3 by Moody’s Investors Service, A-minus by Fitch Ratings and A by Kroll Bond Rating Agency. Fitch lowered New Jersey’s debt by one notch and Moody’s revised the state to negative from stable earlier this month.
“It will be much harder now in a recession for the state to achieve structural balance,” said S&P credit analyst David Hitchcock in a phone interview. “We expect that they will need to sustain a significant amount of short-term borrowing to get through this.”
Hitchcock said there is at least a one in three chance S&P could lower New Jersey’s rating over the next year depending on the magnitude of ongoing revenue losses and potential pension funding shortfalls. S&P will evaluate actual and forecasted revenue losses slated to be determined in May and the final 2021 budget scheduled for adoption by late September as part of its review process.
Hitchcock noted in his report that while New Jersey had been making headway toward addressing past structural budget deficits prior to the COVID-19 outbreak, a steep pension burden persists that will be further challenged while confronting an economic downturn. Budgeted pension contributions in the current fiscal year were at 70% of the actuariallydetermined contribution level with the state planning to increase this amount by 10% each year before reaching full ADC funding in 2023.
A portion of New Jersey’s pension system is funded through lottery revenues, which declined 27% in March compared to the year-earlier period. Hitchcock cautioned that New Jersey’s budgeted pension contributions in fiscal 2020 could be a “tempting target for holdbacks” if the state experiences a steep decline in sales taxes. During the Great Recession of 2008, New Jersey reduced pension contributions and slowed its annual ramp-up in the percentage of ADC contributed.
Gov. Phil Murphy and state lawmakers extended the fiscal year by three months to Sept. 30 to account for virus-related revenue losses and temporary liquidity challenges stemming from the federal government postponing the tax-filing deadline to July 15 from April 15.
Hitchcock said the move would help New Jersey address near-term challenges but stressed that permanent lost tax revenue because of reduced economic activity poses long-term risks that would likely require difficult budget decisions. The state’s ability to make budgetary adjustments is hampered by soaring benefit costs and a high debt load along with sizable public school aid, according to Hitchcock.
“New Jersey has very high fixed costs so it is very hard to restructure the budget,” Hitchcock said. “They already have among the highest debt levels in the country.”
New Jersey’s state tax-supported debt levels were at $3,788 per capita at the end of 2019 fiscal year and will likely rise in 2020 if emergency GO bonds are issued to offset pandemic-related revenue losses, according to Hitchcock.
Murphy proposed legislation this month to authorize borrowing under the Federal Reserve's new Municipal Lending Facility that will directly purchase up to $500 billion in short-term debt issued by states and large municipalities. New Jersey is eligible to issue up to $9.2 billion under the Fed program.
The 2020 budget projected reserves of $1.2 billion, or 3.2% of appropriations at the close of the fiscal year. Hitchcock said those reserves will now be depleted because of the current recession with external liquidity required despite the Murphy administration freezing $921 million of discretionary spending appropriations last month.
New Jersey has the second-lowest bond ratings among U.S. states with only Illinois rated lower.