Pending pension litigation will play a key role in determining whether New Jersey's low credit rating improves or worsens in 2016, according Moody's Investors Service.

Moody's analyst Baye Larsen said in the Jan. 20th report that if the state loses a looming court case in the State Supreme Court that challenges 2011 pension reforms that placed a freeze on cost-of-living adjustments, it would increase unfunded liabilities by 33% from $40 billion to $53 billion. The 2011 COLA freeze had lowered the state's liability by 22%.

Moody's rates New Jersey A2 with a negative outlook. New Jersey has the second lowest credit rating of the 50 U.S. states.

"New Jersey faces outstanding pension litigation that, if decided against the state, would meaningfully worsen its pension liabilities and negatively affect its credit profile," Larsen wrote. "A court decision overturning the COLA freeze would also weaken cash flows of the state's seven pension funds and make the funds more vulnerable to asset depletion."

The New Jersey Pension and Health Benefit Study Commission appointed by Gov. Christie issued recommendations in a February 2015 report that included freezing existing pension plans and shifting to cash balanced defined befit plans. Moody's noted that if these recommendations were enacted it would improve the state's credit profile due to lower long-term pension liabilities.

"This report from Moody's affirms what the Administration has repeated for years: Comprehensive pension and health benefits reform is the key to improving New Jersey's credit profile," said acting New Jersey State Treasurer Ford Scudder. "Conversely, if legal challenges dismantle aspects of the 2011 legislation, New Jersey's credit rating could continue to suffer."

Another issue that could impact New Jersey's bond rating in 2016, according to Moody's, is its Transportation Trust Fund, which is due to expire on June 30. Larsen said a new transportation spending authorization is needed to continue important infrastructure capital improvements and could drive up future borrowing levels and change the state's tax structure.

"Although no specific TTF financing proposals have been announced, the new authorization will include a mix of borrowing and pay-go financing that will influence the state's future leverage position," said Larsen. "New Jersey is the third most leveraged state in the US and the debt service on its $37 billion of outstanding debt comprises 8.9% of its available revenues."

Moody's said in the Jan. 20 report that the TTF reauthorization will likely rely on new revenues or spending cuts to fund debt service and pay-go projects. A plan that is based on reallocating or assuming high growth of existing revenues could pressure the state's general fund or lead to "higher-than-planned debt levels", according to Moody's.

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