Moody's Investors Service changed the outlook on New Jersey's debt to negative from stable.
The negative outlook affects the state's general obligation and appropriation-backed debt, which total $32 billion.
Moody's maintains its Aa3 rating on the state's GO bonds and A1 and A2 ratings on the state's appropriation-backed debt.
"The negative outlook reflects the expectation that the state will face challenges in improving its very weak liquidity position, due to the state's sluggish economic recovery, which has hindered revenue performance, and the ongoing pressure of statutorily scheduled pension contribution increases," said Moody's vice presidents Baye Larsen and Edward Hampton said in a Dec. 17 report.
For challenges, New Jersey has the fourth-highest debt per capita in the nation, high debt service costs, and above-average pension and retiree health benefit liabilities, Larsen and Hampton said. The state does not have a plan to rebuild its reserves. It has a structural budget imbalance that will be pressured by growing pension and post-employment benefit costs.
For strengths, the analysts noted the state's high resident wealth levels and diversified economy. The state has broad executive powers to reduce expenditures. And the government has been using a proactive approach to manage liabilities and cost growth.
Almost 90% of the state's debt service on net tax-supported debt is subject to appropriation.
