How New Jersey keeps falling behind on pension funding

New Jersey’s pension burden will remain a heavy credit weakness for the foreseeable future despite plans to slightly increase funding ratios, according to S&P Global Ratings.

Gov. Phil Murphy’s $37.4 billion budget proposal would raise annual pension contributions by 10% to 60% of New Jersey's actuarially determined contribution, with the state's planned contributions continuing to fall short of full funding for the next four years.

“We believe New Jersey might find reaching full ADC funding difficult, especially if state finances become pressured by a recession during the coming five-year ramp-up period,”S&P credit analyst David Hitchcock wrote in a report Tuesday. “Even without a recession, the state faces the prospect that ADC will grow faster than tax revenue, with consequent pressure on state finances.”

Hitchcock noted that Murphy has the power to reduce midyear pension contributions should unexpected midyear budget shortfalls occur. His executive budget contains $1.5 billion in new taxes that are still subject to legislative approval. Those taxes could reduce the state’s flexibility for future tax increases if needed to increase pension payments, according to Hitchcock.

New Jersey Treasurer Elizabeth Maher Muoio recently increased the pension system’s expected rate of investment returns to 7.5% from 7%, and plans to lower it again in phases. Muoio stressed at the time of the move that keeping the rate of return at the 7% level that the prior administration of Gov. Chris Christie cut it to last November would have required the state add an additional $238 million in pension funding this year.

Recently released Governmental Accounting Standards Board valuations showed a net liabilities reduction for New Jersey’s seven combined pension plans by $26 billion to $142.3 billion as of July 1, 2017, according to S&P. The combined funding ratio of the seven plans also improved slightly to 35.8% from 30.9%, but Hitchcock cautioned that a sustained recovery remains in flux.

“While prosperous times have allowed the state to stabilize its pension system, we believe New Jersey still has a long way to go to achieve healthy pension plans and could risk backsliding amid unexpectedly weak economic conditions should they occur,” said Hitchcock.

S&P cites high pension liabilities as the “primary reason” it rates New Jersey general obligation bonds the second lowest of all states at A-minus. New Jersey is rated A3 by Moody’s Investors Service and A by Fitch Ratings and Kroll Bond Rating Agency. Only Illinois has lower ratings.