New Jersey’s plans to close a large structural budget gap through higher revenue while also increasing pension contributions are at odds with the state’s historic economic trends, according to Moody’s Investors Service.

Analyst Baye Larsen noted that New Jersey is planning to raise contributions each year until 2023 with these increases creating operational spending pressures based on current budget strategies. She said while the state projects to balance the increased pension spending with faster revenue growth, this strategy will be hampered by tax cuts adopted in October that will result in a $1.1 billion loss by the 2021 fiscal year.

"The state will be unable to fully balance its projected budget gap with economic expansion," says Moody's analyst Baye Larsen.
"The state will be unable to fully balance its projected budget gap with economic expansion," says Moody's analyst Baye Larsen.

Moody’s rates New Jersey debt at A3 with a stable outlook, the lowest of the 50 U.S. states with the exception of Illinois.

“If New Jersey's revenue growth continues at the five-year average pace of 2.8%, pension investment returns do not meet actuarial assumptions, and the state does not implement structural budget changes, rising pension contributions would increase annual operating deficits to $3.6 billion by 2023,” said Larsen. “A modest increase in New Jersey’s annual revenue growth is likely, but the state will be unable to fully balance its projected budget gap with economic expansion.”

New Jersey recently reduced its forecast for fiscal 2017 revenue growth to 2.9% from 5.3% after a 0.7% revenue decline in 2016. Larsen notes that outside of budget overhauls, New Jersey has few options for balancing future gaps especially since operating reserves are estimated to drop to 1.3% of revenues by the close of the current fiscal year.

“While future tax increases are possible, the projected $3.6 billion gap is equivalent to 34% of sales taxes and 22% of gross income taxes, making it unlikely a sufficient tax increase would be politically feasible,” said Larsen. “The projected 2023 deficit’s size will also make it politically difficult to close the gap solely with budget cuts and expense reduction.”

Larsen said should the rising pension contribution plans prove “unaffordable”, New Jersey could cut or eliminate part or all of its scheduled payments. However, any drop in pension cash inflows would lower assets to pay benefits and “exacerbate” the state’s pension woes. New Jersey’s $90.2 billion of adjusted net pension in the 2015 fiscal year was fifth highest among states as a percent of revenues, according to Moody’s.

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