Municipal Market Analytics partner Matt Fabian says New Jersey bonds could see short-term spread tightening after a state Supreme Court ruling upheld the suspension of cost of living adjustments to retiree pension benefits.

New Jersey bonds could see spread tightening after a state Supreme Court decision upholding the 2011 suspension of cost of living adjustments to retiree pension benefits, but any boost will likely be short-lived, according to Municipal Market Analytics.

MMA partner Matt Fabian noted in a June 14 report that the while New Jersey bonds could get an immediate lift, the positive market impact likely won't last long, especially if a proposed constitutional amendment requiring quarterly pension payments becomes law. The Supreme Court decision averted an immediate and massive jump in the state's unfunded liabilities that, according to Fabian, would have "almost guaranteed rating downgrades."

Moody's Investors Service said restoring the COLAs would have added $13.5 billion in unfunded liabilities to pension system, which has been the most underfunded of the 50 U.S. states during the last decade, according to a 2015 study from the National Association of State Retirement Administrators.

"The state's financial position remains compromised," wrote Fabian. "The slow post-recession economic growth, enormous (and growing) pension and OPEB liabilities, reliance on non-recurring revenues and some hopeful thinking to balance the budget, extremely narrow reserves and strong anti-tax sentiment weigh heavily on the state's future fiscal condition."

Fabian said that the state's failure to fully fund its actuarially required contribution for the next several years "will increase the financial burden on the state and its taxpayers."

He notes that the consolidated annual report for the state's pension plans show that the two largest plans will have assets depleted and unable to cover liabilities in the next 10 years. The net position on New Jersey pension and OPEB trust accounts declined by nearly $2 billion in the 2015 fiscal year, according to Fabian.

"The decline can be largely attributed to the state's underfunding of its contribution and lower than assumed investment returns," he said.

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