Standard & Poor’s Wednesday downgraded New Jersey’s general obligation credit rating to AA-minus from AA due to its unfunded pension liability and high debt levels.

The outlook is stable. The rating change also drops to A-plus from AA-minus $27.8 billion of debt backed by state appropriation. New Jersey has $2.6 billion of outstanding GO debt.

In addition, Standard & Poor’s downgraded to A-minus from A $296 million of outstanding South Jersey Port Corp. bonds, which carry the state’s moral obligation pledge.

“Our concern is that the pension liability has grown and the funding for the pension system has been skipped for the last two years and is expected to continue to be less than 100% over the next several years,” Standard & Poor’s analyst Jeffrey Panger said in an interview. “The state has addressed its falling revenues by skipping these payments. This puts some stress on future budgets because what you don’t pay today you have to pay extra tomorrow, and so that is our concern.”

Standard & Poor’s recently launched new rating criteria for U.S. states, which more transparently incorporates debt, pension, and other post-employment benefit liabilities in the rating evaluation.

New Jersey’s unfunded pension obligation is $37.1 billion, and it has a funding ratio of 56%. Republican Gov. Chris Christie did not include a $3 billion pension fund payment in the fiscal 2011 budget, his first spending plan. The state has a history of avoiding allocations to its pension fund to balance annual budgets. Unfunded OPEB liabilities for the state and its municipalities total $66.8 billion.

Like many states, New Jersey is struggling to meet long-term retirement obligations while addressing structural deficits. Christie is set to release his fiscal 2012 budget proposal on Feb. 22. Officials peg the fiscal 2012 deficit at nearly $11 billion. The fiscal year begins July 1.

The state must begin phasing in pension payments starting in fiscal 2012, with those allocations reaching a full contribution by fiscal 2018.

Standard & Poor’s will monitor how New Jersey addresses its long-term liabilities while the state balances recurring revenues with recurring expenses. “Meaningful progress” on both issues could raise the rating, Standard & Poor’s said in a report. Additional increases to its unfunded pension and OPEB liabilities or larger budget shortfalls could place downward pressure on the rating.

Democratic and Republican lawmakers recently filed legislation to change the state’s retirement system, including boosting the retirement age, increasing employee contributions, and other initiatives. The administration believes its pension reform measures would give the state’s pension system a funding ratio of 91% by 2041.

“They are apparently taking some steps to address the pension issue,” Panger said. “However, we believe that that will take many years to adequately address.”

Christie and Treasurer Andrew Sidamon-Eristoff stressed that New Jersey must move forward with pension reform.

“While New Jersey’s bonds remain sound and respected investments, this downgrade highlights the real danger of failing to act swiftly on critical pension, health benefit, and fiscal reforms,” Sidamon-Eristoff said in a statement.

Fitch Ratings rates New Jersey AA with a stable outlook. Moody’s Investors Service assigns a Aa2 with a negative outlook.

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said the lower credit rating reflects his firm’s evaluation of New Jersey and the market’s view of the credit, as well.

“From our perspective, the state GO rating, based on our internal credit research, is an A1 equivalent,” Pietronico said. “And the rating agencies are only moving a little bit closer to where we see the rating and ultimately where the market does because the bonds have been trading more in the A-rated camp for some time.”

New Jersey’s credit strengths include a diverse economic base, high wealth and income levels, and continued efforts in balancing yearly budgets during periods of declining revenue.

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