New Jersey legislation requiring quarterly pension payments starting in the 2018 fiscal year will not likely influence the state's credit conditions, according to Fitch Ratings.
Fitch senior director Marcy Block said in a report Wednesday that while pension payments every three months at the end of each quarter could lead to higher future cash flow borrowings, the change will not likely have a meaningful impact on New Jersey's liquidity, budgetary flexibility or high pension liabilities. Block emphasized that the new payment schedule is statutory and not constitutional so it will not limit the governor's executive authority to strike or cut pension contributions if the state experiences an unanticipated revenue shortfall. New Jersey is rated A by Fitch due largely to persistent underfunding of pension liabilities.
Block noted that the bill signed on Dec. 15 by Gov. Chris Christie provides flexibility for the executive branch to make pension contributions at the time of its choosing within a quarter. The legislation also states that the pension fund can reimburse the state treasury department if borrowing is needed to make payments. The state has $1.5 billion in privately placed tax and revenue anticipation notes outstanding for the 2017 fiscal year, according to Fitch.
"New Jersey's pension contribution, because it has historically been paid at fiscal year-end rather than periodically through the fiscal year, has become by default a form of budgetary cushion, notably when spring personal income tax collections (PIT) lag forecast expectations," said Block in her report. "In fiscal 2014, the governor slashed the annual pension payment by $883 million as a means to address a late-year $1 billion budget gap created, in part, by disappointing April PIT collections."
Block pointed out the quarterly pension legislation may reduce year-end budgetary cushion, but a "still sizable balance" would remain in the last quarter of fiscal 2018 of $600 million from an expected $2.4 billion pension system payment. The bill does not change a one-tenth ramp-up schedule of annual pension payments to reach the actuarially determined level by fiscal 2023. She said that while contributions earlier in the fiscal year could result in higher accrued investment earnings over time, the gains would likely be far lower than the pension systems' "unrealistic" 7.9% assumed return level.
"Fitch expects the new law to have little positive impact on the state's very strained pension systems in the near term," said Block. "Given the forecast depletion dates for six of the state's seven plans, Fitch expects the systems' funded status to continue to erode, requiring shorter duration investments to support benefit outflows."
