Municipal bond analysts are pessimistic about New Jersey, and this week's Moody's Investors Service downgrade underscored why that is so.
"New Jersey's credit profile is, without a doubt, on a downward slope," said Janney Capital Markets municipal credit analyst Tom Kozlik. "The state has not at all prepared itself for the next financial downturn, much less done anything to regain structural balance."
Moody's downgraded New Jersey's general obligation bond rating to A1 from Aaa3 on Tuesday night. It also downgraded its appropriation and GO-related bond ratings one notch to either A2 or A3. In total, the downgrade affected $42.2 billion in debt.
The outlook is negative.
Moody's actions follow nearly identical actions by Fitch Ratings and Standard & Poor's in the last five weeks.
New Jersey is now at A-plus rating levels across the board.
Howard Cure, Evercore Wealth Management's director of municipal research, said that Moody's downgrade will have little impact on the pricing of New Jersey's bonds because it had already been anticipated.
U.S. Trust managing director David Litvack agreed that the market had already priced in the downgrade. "We believe that closing its budget gap with recurring revenues and expenditures, as opposed to 'one shots,' and maintaining scheduled pension contribution increases will be key to stabilizing its credit."
"New Jersey still faces some challenges even at its current rating level as the budget is not structurally balanced," Cure said.
"It remains to be seen if the governor (Chris Christie), who has been proposing additional pension reforms, can get it through the legislature," Cure said.
"The governor may not have the mandate of the voters that he once had prior to the Port Authority/George Washington Bridge problem. The legislature may be more willing to stand up to the governor and propose balancing the budget with tax increases - something the governor is loath to do," he said.
"We, like most, are concerned about New Jersey's optimistic revenue assumptions, and use of one-time fixes, but we are most concerned about New Jersey's pension funding treatment," Kozlik said. "Balance requires a significant amount of political will, but the longer the state political actors wait, the more politically and financially difficult changes become.
"It is important to note that the deterioration of New Jersey's credit will also affect New Jersey issuers in other municipal sectors," Kozlik said. "New Jersey local governments, among others for example, will likely receive less state funding as the state lawmakers struggle to regain a structurally balanced budget."
The localities may feel an immediate impact, Cure said, because Christie may use his executive authority to restore balance to this fiscal year by cutting aid to local governments, school districts and public universities. In response, ratings agencies may cut the ratings of some of these entities. Recently, Moody's made a similar point about the impact of New Jersey's proposed cuts for school districts serving many poor students.
Also, New Jersey government may divert surplus money from toll roads to pay for other transportation projects, undercutting New Jersey Turnpike Authority credit, Cure said. New Jersey may do similar things with revenues from other authorities.
"Though Tuesday's decision from Moody's leaves New Jersey with a 'strong credit' classification and unimpeded market access, it again affirms the urgent need to address New Jersey's long-term fiscal health and the key cost drivers that threaten it - the rising costs of public employee pension and health benefits, and debt service," said the New Jersey Treasury Department's director of communications, Joseph Perone.
"The administration will take the action necessary to offset revenue shortfalls and ensure a constitutionally balanced budget in the near term, but recent actions from the rating agencies make it clear that long-term issues must be addressed to truly shore up our fiscal health. This should serve as a clear warning and call for the legislature to join the governor in taking on the cost of these entitlements in a real way to secure our long-term fiscal health and protect our ability to make investments that matter most."
