New Jersey budget plan would help keep GO ratings steady
New Jersey Gov. Phil Murphy’s $38.6 billion budget proposal sets the stage for near-term stabilization of the state’s weak credit conditions, analysts said.
Murphy’s fiscal 2020 spending plan hinges far more on reductions than several tax increase initiatives included in last year’s proposed budget that set up clashes with fellow Democratic lawmakers during his first year in office and nearly led to a government shutdown. The second-year governor’s budget unveiled March 5 was aided largely by $798 million in employee health benefit savings and $475 million of recoverable Medicaid funds from cost-cutting agreements reached last year.
“The governor has recognized that he had to be accommodating to the prerogatives that the legislature holds,” said Marc Pfeiffer, assistant director of the Bloustein Local Government Research Center at Rutgers University. “He and his team have had a firmer grasp on the budget process than their first budget last year.”
While the plan includes $550 million of revenue raisers highlighted by a proposed millionaire’s tax that could face challenges in the legislature, Pfeiffer said Murphy has established a much better starting point than year one as governor. Pfeiffer expects that the millionaire’s tax will lead to negotiations that could include enacting it as a temporary measure to help fund the state’s scheduled 10% pension ramp up through a record $3.8 billion contribution.
The planned $554 million budgeted increase for the pension system would bring the state to a 70% actuarially determined contribution level and keep the state on its schedule for full ADC funding in 2023. Low pension funding levels have dragged New Jersey’s general obligation bonds to the second lowest ratings of all U.S. states at A-minus by S&P Global Ratings, A3 by Moody’s Investors Service and A by Fitch Ratings and Kroll Bond Rating Agency, all with stable outlooks.
“At worst, the state’s credit should be stable for the next year assuming there are no other major changes to the budget,” Pfeiffer said.
Lisa Washburn, managing director at Municipal Market Analytics, said the pension funding commitment in the budget combined with odds of an on-time adoption would be a positive for the state’s credit. She noted that the budget plan allots about 85% of its 1.7% year-over-year increase toward pension funding.
“An on-time budget plus a commitment to making the pension funding ramp payment (if enacted) would help to stabilize the state’s ratings over the next year, absent an unforeseen event,” Washburn wrote in a report released Tuesday. “A more stable rating environment could well be a constructive development for New Jersey appropriation and GO bonds.”
Despite the pension funding , Washburn cautioned that the state’s unfunded liability and growing required contribution remain a barrier toward the making investments in other important budget items like infrastructure and education. She said that if the budget is passed in its current form, MMA estimates New Jersey would have a structural imbalance of between 5%-7% when factoring in unfunded pension contributions, fund diversions and “questionable” revenue or savings.
Pfeiffer credited the Murphy administration for forging a healthcare benefits deal with public workers last September that provides important budgetary flexibility. He said more initiatives aimed at finding other healthcare and benefit savings will likely occur this spring and could be adopted in tandem with the budget.
The State Senate Budget and Appropriations Committee has scheduled two hearings on the proposed spending plan on Thursday at the New Jersey Institute of Technology and March 28 at Salem County Community College. Lawmakers have until midnight on June 30 to adopt an on-time budget.