N.J. avoids credit rating downgrade despite pension, road funding woes

Standard & Poor's assessment came with a negative outlook, which it said "reflects our view that New Jersey's pension liabilities will remain a source of downward pressure on the rating."

Fitch Ratings also assessed the state's enduring pension underfunding challenges and also said it's "cautious" on the state's ability to meet its revenue forecasts this year.

Fitch noted that despite the state's more conservative revenue forecasting in recent years — a departure from years of overly optimistic estimates that left big holes in the budget when tax collections came up short — the state still had a shortfall near the end of the fiscal year that ended in June. 

Gov. Chris Christie's administration closed the shortfall but the state doesn't have much in reserve in case of emergencies. 

The agencies also made note of two of the state's more prominent financial "challenges" the state "remains unable to address": public pension funding and funding for transportation projects.

Fitch said New Jersey's credit rating takes into account "a history of structurally-imbalanced financial operations, persistent underfunding of its liabilities, an elevated debt burden, and economic performance that has only recently begun to show positive momentum following the national recession that ended in 2009."

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The rating agency made similar observations about New Jersey's pension and transportation woes in March, when it deemed the state's credit outlook "stable."

Both agencies defines their 'A' rating as a relatively low risk of default with some vulnerability to changing economic conditions. Credit ratings can affect the state's cost of borrowing, and New Jersey has been downgraded by various credit agencies a record nine times under Christie.

The Transportation Trust Fund expired at the end of June without a new funding scheme in place, prompting Christie to order a statewide freeze on $3.5 billion in road and rail construction projects.

New Jersey contributed $1.3 billion to government worker pensions last year, about $3 billion less than recommended by actuaries. It is budgeted to contribute $1.86 billion this year.

A proposed constitutional amendment that, if approved by voters, would have required the state to increase annual payments up to the full actuarial amount will not appear on this fall's ballot after getting caught in the fight over transportation funding.

Even without it, the state is increasing its contributions by one-tenth of the actuarial recommended amount each year. Fitch warned those increased costs will likely be "well ahead of expected revenue growth."

"This disparity presents a significant challenge to the state as it grapples with identifying funding sources to finance transportation capital needs and is likely to crowd out other spending priorities," it said.

The two largest pension plans in the public pension system, the Public Employees Retirement System and the Teachers' Pension and Annuity Fund, are each severely underfunded. Based on new accounting rules that force the state to anticipate lower investment returns, PERS has 38.2 percent of the money it needs to pay for future benefits, and TPAF, 28.7 percent.

The unfunded pension liabilities help push the state's otherwise improving debt load well above the median for U.S. states. It is 16.5 percent of 2015 personal income, compared with the 5.8 percent median, Fitch said.

S&P warned that further reduction in pension funding levels could lead to additional downgrades. And improvement in its outlook depends on whether the state meaningfully takes on pension reform or demonstrates a "significant and sustainable funding commitment." 

But that, too, comes with a risk, the agency said.

"Higher pension contributions would translate to less budget capacity in the near term, bringing other budget challenges to the surface," it said. "Given the state's lack of reserves and high fixed costs, New Jersey would likely need to make other budget reforms to accommodate increases in pension funding."



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