New Jersey Gov. Chris Christie has proposed reforms to address the state's pension challenges, which Moody's cited as a reason for its downgrade to A2.

New Jersey's credit rating was cut one notch with a negative outlook by Moody's Investors Service, which cited the state's budget imbalance and pension funding shortfall.

Moody's announced late on April 16 that the Garden State's general obligation bonds were slashed to A2 from A1 affecting $32.2 billion of borrowing.

"The downgrade to A2 was driven by the lack of improvement in the state's weak financial position and large structural imbalance, primarily related to continued pension contribution shortfalls," said Moody's analysts Baye Blakelee Emery Larsen and Edward Hampton in their ratings report. "We expect liquidity and structural balance to remain very weak through fiscal 2016 general obligation bonds."

Moody's said the state faces challenges formulating its fiscal 2016 budget as well as implementing "long-term structural balance." Plans for improved financial conditions going forward rely heavily on economic growth and pension reforms, which both have uncertain timing and impact, the rating agency said.

Gov. Chris Christie vetoed $1.6 billion in pension payments from the 2015 budget last June prompting a lawsuit from public unions that is headed to the New Jersey Supreme Court on May 6. Christie stated in his Feb. 24 budget address that closing the state's pension-funding gap without reforms would require increasing the sales tax to 10% or hiking the income tax by 29%.

"The negative outlook reflects our expectation that the state's financial and pension position will weaken further before pension reform," Larsen and Hampton wrote. "Without meaningful structural changes to the state's budget, such as pension reform that dramatically improves pension affordability, the state's structural imbalance will continue to grow, and the state's rating will continue to fall."

Christopher Santarelli, a spokesman for New Jersey Treasurer Andrew P. Sidamon-Eristoff, said Christie's proposed 2016 $33.8 billion fiscal budget would contain 2.8% of non-recurring revenue sources compared to 13.2% in 2010. He added that the Moody's downgrade emphasizes the importance of enacting reforms recommended by the New Jersey Pension and Health Benefit Study Commission, which proposes freezing pension benefits for current state employees and shifting them to a new cash balance defined benefit plan.

"Moody's action Thursday once again underscores the urgent need for structural reforms of our public employee pension and health benefits system," Santarelli said. "New Jersey's long-term pension and health benefits liabilities remain serious long-term financial challenges."

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