The absence of a significant plan to combat New Jersey's deteriorating finances will lead to more rating downgrades and wider credit spreads, according to Janney Capital Markets.
Janney municipal analyst Alan Schankel wrote in a report Wednesday that New Jersey is unique among the nation's "yieldy states" because most of its tax-supported debt lacks the general obligation full faith and credit pledge, with 90% subject to annual legislative appropriation. Schankel said New Jersey is burdened by having among the lowest pension funding levels of any state combined with a high debt load and other post-employment benefit liabilities. He also said a recent sales tax cut from 7% to 6.625%, combined with phasing out the estate tax under last year's $16 billion Transportation Trust Fund renewal, will slash annual revenue by $1.4 billion by 2021.
Schankel said New Jersey's pension woes worsened when faced with revenue shortfalls and budget gaps in fiscal years 2014 to 2016, when the state cut pension funding to an amount below a scheduled-ramp up Gov. Chris Christie had agreed to his 2011 pension reform legislation. The New Jersey Supreme Court ruled in favor of the state when labor unions challenged the cuts, leading to pension funding levels falling further behind. Schankel emphasized that pension underfunding has been "aggravated by current leadership", but stretches back decades to past administrations from both political parties and will not likely be solved by whoever the new governor is next year after Christie's term expires Dec. 31.
"This long history of kicking the can down the road seems poised to continue, and although New Jersey appropriation backed debt offers some of the highest yields among all states, we advise caution," said Schankel. "Given the persistent lack of political willingness to aggressively address the state's financial morass, we believe the future holds more likelihood of rating downgrades than upgrades."
The Janney report looked at the five states with the highest yields, which in addition to New Jersey also include Illinois, Connecticut, Pennsylvania and Louisiana. The Garden State had the second highest spreads among this group of five at 102 basis points with only Illinois wider at 213 bps.