Citing pension woes, S&P just cut N.J's credit outlook to negative
TRENTON — Standard and Poor's Ratings Services lowered its outlook for New Jersey from stable to negative Tuesday over concerns with the state's declining pension funding levels and growing retirement liabilities.
Last week, Fitch Ratings assigned New Jersey a stable outlook, though it also warned of New Jersey's mounting retirement liabilities and relatively high debt load. But Standard and Poor's took a dimmer view of the state's financial picture.
Those retirement benefits costs are putting "significant" pressures on the state, the agency said, and they're made worse by contributing less than recommended by actuaries to keep the system solvent and by unremarkable investment returns.
The pension fund returned 4.16 percent last fiscal year, and its market value fell below $71 billion at the end of December.
A spokesman for the Treasury Department, Christopher Santarelli, said the department is "gratified that all the rating agencies maintained New Jersey's credit rating in recent days and that only S&P changes its outlook."
"S&P noted improvements in the State's surplus, revenue forecasting, and economic profile, but stated the obvious, that New Jersey's postemployment liabilities continue to be our Achilles heel," he said.
Standard and Poor's also highlighted the potential impact of a lawsuit pending before the New Jersey Supreme Court that could require the state to reinstate cost-of-living increases for retired public workers, which would boost the state's $40 billion in unfunded liabilities higher and annual required payments even higher. (The state's unfunded liabilities are $135.7 billion under a different accounting standard)
Those increases were frozen as part of a 2011 pension reform package designed to cut system costs. Oral argument were held last week.
Legislation proposed by Democrats to constitutionally require the state contribute to the fund could "substantially limit the state's budgetary flexibility, especially during economic downturns, and limit reform efforts," the agency said in a statement.
Opponents of the proposed referendum, which would have to be approved by voters, have similarly expressed concerns about limiting the state's ability to respond to another recession — Gov. Chris Christie slashed pension payments when tax revenues came up short — while proponents say the state must pay the bill now or pay much more later.
"Even in the absence of extraordinary aggravating factors, a continuation of the current trend of declining pension funded levels could also lead to diminished credit quality over the outlook horizon ...," the rating agency said in a statement.
The agency called the state's current funding path, which gradually increases the amount paid into the pension fund each year, an "improved, but still very weak funding discipline."
Standard and Poor's was skeptical even that New Jersey would keep to that schedule, given "the state's track record."
Christie's proposed budget for the fiscal year that begins July 1 includes $1.86 billion for pensions, in line with the payment plan. He's also backed a sweeping overhaul of workers' pension and health benefits that hasn't gained traction.
Despite the outlook change, the agency affirmed its "A" rating on New Jersey's general obligation bonds. That rating also recognizes the state's structural deficit and "above-average debt burden," it said, while crediting the state's growing surplus, high wealth and "diverse economic base."
The agency said it would need a show of good faith that the state is going to improve the system's funding or pass pension reforms to boost New Jersey's rating back to stable.
Brian Murray, a spokesman for Gov. Chris Christie, said: "This outlook change should serve as a wake-up call to Democrat legislators in Trenton: if they do not join the governor's efforts to make public employee entitlements affordable for taxpayers, and if they continue to fight to enshrine these costs in the state constitution, it will be devastating to the budget and to the economy."