New Jersey Gets Its Own Downgrade

by Daniel Foster

Fitch ratings has downgraded New Jersey from AA to AA-. That’s bad on it’s face, and is sure to be a major talking point for the Democrats as they head into November elections (all 120 seats in the legislature are up). But the text of the Fitch downgrade is actually quite good for Christie, especially the highlighted sentences:


Fitch Ratings downgrades the State of New Jersey’s outstanding general obligation (GO) bonds to ‘AA-’ from ‘AA’.

Fitch also downgrades to ‘AA-’ from ‘AA’ the rating on the Garden State Preservation Trust’s open space revenue bonds. Additionally, Fitch downgrades to ‘A+’ from ‘AA-’ the ratings on the state’sappropriation-backed debt and other related debt, which is detailed at the endof this release.

The Rating Outlook for all affected bonds is revised to Stable from Negative.

The downgrade of the state’s GO rating to ‘AA-’ from ‘AA’ reflects the mounting budgetary pressure presented by significant and growing funding needs for the state’s unfunded pension and employee benefit liabilities, particularly in the context of a weak economic recovery, a high debt burden, limited financial flexibility, and persistent structural imbalance.

Despite recent, significant action to contain future growth in the state’s accumulated pension liability, continued funding level deterioration is projected through the medium term as full funding of the actuarially required contributions is phased in, resulting in sizeable increases in annually required contributions.  Fitch believes that meeting the requisite increases in pension contributions will be challenging and is likely to conflict with other long term challenges, such as property tax relief, school funding, and infrastructure needs.

Management has proactively responded to past revenue weakness, and growth in state spending has been contained.  Nevertheless, the state’s budget remains structurally imbalanced inclusive of unfunded pension contributions.  Reserve balances are expected to remain narrow, offering limited flexibility to absorb unforeseen needs.

That the state’s budget — and especially its pension liabilities — remain structurally unbalanced despite the reforms Christie pushed through the legislature is a mark of just how poorly the state was run for so many decades. The line about pension contributions conflicting with “other long term challenges, such as property tax relief, school funding, and infrastructure needs” can likewise be used as a weapon by Christie. He’s already won — and won again — the argument over whether the solution to New Jersey’s woes is the raising of taxes (in the nation’s most tax-burdened state). This can help him win  the argument that the state’s pension and health care costs make everybody’s priorities — Republicans and Democrats alike — unaffordable.

The Corner

The one and only.