The New Jersey Supreme Court decision that pension contribution levels aren't contractually protected under a 2011 law will accelerate the state's already high growth of pension liabilities, according to Moody's.
The 5-2 ruling June 9 by the Garden State's highest court reversed a lower court decision and upheld Gov. Chris Christie's veto of $1.57 billion in pension contributions from the 2015 budget. Public employee unions had argued that a 2011 law signed by the Republican governor implementing a scheduled ramp-up of the state's pension funding over seven years created a contractual right to the funding.
As of fiscal 2015, the gap between New Jersey's actuarial annual required contribution and actual contributions has grown by roughly 10% of its budget compared with 4% in 2008, Moody's said in a June 10 report. The unfunded liability grew to 121% of revenues in fiscal 2013 from 71% of budgeted revenues in 2008. A preliminary estimate of Moody's-adjusted pension data shows a rise in the state's adjusted net pension liability to 250% of government revenues in fiscal 2014 from 180% a year earlier, which ranks New Jersey among the worst three in the nation.
"The decision mitigates the risk of sudden late-year liquidity and budget pressure, but perpetuates severe pension underfunding and rapid growth of state liabilities," Moody's analysts wrote. "The decision supports the state's ability to cut its current and future pension contributions to levels that will further weaken pension funding."
Christie's veto reduced New Jersey's fiscal 2015 pension contribution to $681 million, well-below the "statutorily required" $2.2 billion and the $3.9 billion ARC, Moody's wrote.
Christie's proposed fiscal 2016 budget includes a contribution of $1.3 billion, making it 40% of the statutory required contribution and 30% of the ARC. The proposed 2016 budget also recommends the state defer its future pension schedule to increase payments by one-tenth of the ARC.
Moody's cut New Jersey's bond rating to A2 from A1 in April citing the state's budget imbalance and pension funding shortfall.