New Jersey school districts could face higher credit risks from potential fixes for the state’s “chronic teacher pension underfunding”, according to Moody’s Investors Service.

New Jersey’s Teachers’ Pension and Annuity Fund makes up the largest portion of the state’s $80.5 billion in unfunded pension liability as of 2014, according to Moody’s. A state commission has recommended creating a new plan that would shift pension costs from the state to the school districts that would be paid for through savings in healthcare plans across districts and local governments. Moody’s analyst Josellyn Yousef notes that if reforms deviate from the commission’s intent to be cost neutral, districts may be forced to increase taxes, cut costs, increase borrowing or spend reserves to account for the shift.

“Each option offers potential downsides or limitations,” said Yousef. “For example, raising taxes would be simplest but the ability and willingness of taxpayers to accept a higher levy may be limited.”

Yousef noted that since 2010, state pension contributions to TPAF have averaged only 15% of the annual required contribution. New Jersey’s spending on pensions and other post-employment benefits has increased to 8% of the fiscal 2015 budget compared to 4.9% in 2010, according to Moody’s.

A potential wild card school districts may encounter is an ongoing lawsuit New Jersey faces arguing that annual cost of living adjustments to retirees’ pension benefits are contractually protected. Moody’s estimates that if the state’s 2011 COLA freeze is reversed, it would increase the pension funds’ unfunded liabilities and annual contribution needs for TPAF by roughly 35%.

Moody’s rates New Jersey A2 with a negative outlook.

“The Moody’s report calls attention to an important issue which only gets worse as time passes without action," Tom Healey, chair of the Pension and Benefit Study Commission, said in a statement. "Unless choices are made now to bend the cost curve down on benefits, both State and local governments in New Jersey will face far more difficult choices in the near future.  The Moody’s report contrasts other possible reforms that would pose a grave risk to State and local budgets with the Commission’s proposed comprehensive solution, which would remedy the State budget funding crisis without increasing property taxes.”

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