The $34.8 billion 2017 fiscal budget proposed by New Jersey Gov. Chris Christie would weaken the state's credit position and increase the chances of future bond downgrades, according to Municipal Market Analytics.

MMA partner Matt Fabian noted in the Feb. 22 report that the spending plan pitched by Christie relies on $204 million in transfers from the New Jersey Turnpike Authority and $115 million from the state's Clear Energy Fund. Fabian said other aspects of the budget that could pose credit risks are underfunding pensions by $2.8 billion, shorting schools relative to the state's School Funding Reform Act requirement, and not addressing the Transportation Trust Fund due to expire in July.  The budget also relies on identifying $250 million in savings from proposed cost reduction reforms for public employee and retiree health benefits.

"MMA expects that the state's bonds will underperform the market as these issues are debated," he wrote. "The revenue interaction between the state and local governments means that the price impact is likely to affect New Jersey government credits more generally, particularly at the lower end of the credit spectrum."

Christie said during his Feb. 16 budget address that 95% of the budget is geared toward pensions, health benefits and debt service with only 1% comprised of "one-shot revenues." Fabian notes that the unfunded liability for pensions and other post-employment benefits is cited at "a hefty" $144 billion, which is more than four times annual revenues.

"The amount required to fund these liabilities leaves little money to invest in other budget areas, such as infrastructure and education," said Fabian. "MMA believes that absent a rethinking of the tax scheme in New Jersey the breadth of the sales tax, an increase in the gas tax, reducing reliance on the property tax for local funding—the state will continue to struggle to find funds to reverse the course of under-investment."

New Jersey has the second lowest credit ratings of the 50 U.S. states at A2 from Moody's Investors Service and A by Fitch Ratings, Standard & Poor's and Kroll Bond Rating Agency.

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