TRENTON — Wall Street analysts at Fitch Ratings today downgraded New Jersey’s bond rating for the second time this year, citing the state’s poor economic performance, Gov. Chris Christie’s rosy revenue forecasts — which failed to materialize — and his decision to plug the resulting budget gap by cutting $2.4 billion in funding for the state’s strained pension system.
Fitch said Christie’s decision to cut the pension payments this year marked a “repudiation” of a bipartisan plan he signed to fix the beleaguered retirement system for public workers, which is underfunded by nearly $40 billion, according to state estimates.
Instead of pumping bigger cash infusions every year into workers’ retirement accounts to save them from collapse — as Christie and lawmakers agreed to do in his first term — New Jersey is now stepping away from its plan, Fitch said.
“Following significant revenue underperformance, the state relied upon the repudiation of its statutory contribution requirements to the pension systems to return to budgetary balance, exacerbating a key credit weakness,” the Fitch analysts wrote in a note to investors, lowering their rating on the state’s debt from A+ to A.
Fitch previously downgraded New Jersey by one step in May, while Christie was negotiating the new $32.5 billion budget with the Democrats who control the Legislature, which took effect July 1. Today’s downgrade means the Wall Street analysts did not like the finished product, calling it a return to one-shot budget Band-Aids and “extremely narrow financial reserves.”
“New Jersey’s economic performance continues to lag that of the nation and a multitude of long-term spending demands are expected to prolong the achievement of sound financial operations,” the analysts wrote. Fitch is keeping a “negative outlook” for New Jersey, meaning an upgrade of the state’s credit rating is unlikely.
Throughout the year, downgrades have bedeviled Christie, a Republican who says he is thinking of running for president in 2016 and is visiting Mexico this week on a trade mission. Moody’s Investors Service and Standard & Poor’s also issued ratings cuts during the budget season.
Every time the rating goes lower, the state’s borrowing costs for major projects such as schools and road upgrades are likely to increase. Today’s downgrade marked the seventh time the state’s rating was cut under Christie’s watch, the most under any New Jersey governor.
A spokesman for the state Treasury Department said Christie “acted responsibly” by shrinking two pension payments that had been scheduled for the current and previous fiscal years.
“Without raising taxes on an already overburdened populace, Governor Christie has already contributed more to the pension system than any previous governor,” said the Treasury spokesman, Chris Santarelli, in an emailed statement.
“As rating agencies and ratings expectations have been recalibrated following the financial crisis of the late 2000s, the state Treasury and Office of Public Finance have worked tirelessly to ensure that New Jersey is rated fairly and equally by the Wall Street rating agencies; and will continue to do so.”
After state tax collections fell far behind Christie’s estimates in April, the governor said he decided to short the pension payments instead of making last-minute budget cuts to hospitals, schools and other parts of the social safety net. The two-year budget gap was north of $2 billion.
Christie’s funding cuts for the pension system sparked a flurry of lawsuits that are ongoing in state Superior Court. This week, lawyers for the governor said he cannot be forced to keep making bigger payments, despite signing laws in 2010 and 2011 that pledged those contributions.
Santarelli added that there have been signs of improvement in the state’s economic picture over the summer, such as “steady revenues and growing employment numbers.”
“New Jersey needs additional, long-term, fiscally sustainable solutions to address the state’s considerable debt obligations and significant unfunded retirement liabilities,” he added. The governor has convened a special task force of pension experts to study ways to dig New Jersey out of its deepening hole. “We invite the Legislature to join the governor in taking responsible action to meet this paramount challenge to our long-term fiscal health.”
Fitch analysts took a less optimistic view. “New Jersey benefits from a wealthy populace and a broad and diverse economy,” they wrote. “However, the state’s economic performance has lagged the nation in recovery from the recent recession, with improvement in 2013 trailing off at the close of the year, and very slow year over year … employment growth continuing through 2014.”
The state is also carrying a high debt load at a time when “demands for school construction, environmental protection and transportation remain large,” they added. “Net tax-supported debt as of June 30, 2014 equaled 7.4 percent of 2013 personal income as compared to a median of 2.6 percent for the states,” Fitch said.