New Jersey's rising OPEB burden
New Jersey’s soaring liabilities for post-employment benefits other than pensions are adding further weight to the state’s fiscal challenges.
Fitch Ratings analyst Marcy Block wrote in a report Wednesday that New Jersey’s recently released 2018 fiscal year comprehensive annual financial report and debt statement showed that the state’s other post-employment benefit, or OPEB, liabilities rose to $90 billion triggered primarily by implementation requirements related to Governmental Accounting Standards Board (GASB) Statement 75. Block said the increased OPEB liability is “sizable” in the context of the state’s personal income and a rising burden for outstanding debt and unfunded pensions.
Block said the OPEB liability is not expected to affect Fitch’s A credit rating for New Jersey, since healthcare obligations are considered more “flexible” compared to pensions. She cautioned though that the $90 billion liability as of June 30, 2017 is “extensive” with the number equating to 15% of 2018 personal income.
“This is significantly higher than the actuarial accrued liability of $69.3 billion determined under the former GASB 43 standard as reported in the state's fiscal 2017 CAFR and larger than the $80 billion total OPEB liability preliminarily estimated by the state in September 2018,” Block wrote.
The new GASB 75 provisions require New Jersey to recognize the state's legal obligation to pay OPEB benefits for local government plans, which Block said resulted in an $8.7 billion liability. The actuarial accrued liability previously recognized New Jersey’s OPEB obligation for state active and retired members as well as employees and retirees of the state’s school districts and colleges.
New Jersey’s most sizable OPEB obligation calculated under the new GASB 75 standard resulted mainly from including special funding for qualified police and firefighter retirees and dependents who were in local government plans, according to Fitch. Block added that the utilization of a “more conservative” entry age normal actuarial cost method and a lowering of the assumed discount rate from 4.5% to 3.58% also contributed to the OPEB increase.
The OPEB challenges facing New Jersey are on top of an unfunded pension burden reported at $99.6 billion at the close of the 2018 fiscal year, which was lower than $115 billion reported in fiscal 2017 due to higher discount rates and increasing contributions, according to Block. When factoring in tax-supported debt of roughly $41 billion, New Jersey has total liabilities of $230 billion, among the largest of any state.
Rising pension obligations and structurally imbalanced budgets triggered 11 rating downgrades for New Jersey general obligation bonds between 2011 and 2017 making Illinois the only-lower rated U.S. state. The state has debt ratings of A-minus by S&P Global Ratings, A3 by Moody's Investors Service and A by Fitch and Kroll Bond Rating Agency.
A Janney Capital Markets report Thursday said that the municipal bond market has been “more accepting” of New Jersey’s credit challenges lately. The 10-year spread between New Jersey GO yields and the 10-year Treasury has dropped recently to 47 basis points compared to 103 bps seen a year ago, according to Janney.