Moody's Investors Service downgraded New Jersey's general obligation bonds by one notch to A2, citing the state's “weak financial position and large structural imbalance, primarily related to continued pension contribution shortfalls.”
The ratings agency, which issued a report Thursday describing its reasoning, also maintained a negative outlook on the state.
“The negative outlook reflects our expectation that the state's financial and pension position will weaken further before pension reform, if successful, is implemented,” the report said.
“Without meaningful structural changes to the state's budget, such as pension reform that dramatically improves pension affordability, the state's structural imbalance will continue to grow, and the state's rating will continue to fall,” the report added.
The downgrade affects $2.2 billion in general obligation bonds as well as $30 billion in appropriation-backed and other general obligation-related debt, the Moody's report said.
The report didn't provide a detailed discussion of New Jersey's public pension system, but it said one factor that could help New Jersey's rating go up was “improved pension contributions and funding that eliminates the risk of pension asset depletion.”
New Jersey is mired in legal and legislative battles over contributions to the state pension system and Gov. Chris Christie's recommendations for changing the system.
On May 6, the New Jersey Supreme Court will hear oral arguments on a challenge by more than a dozen public employee unions against the governor's withholding $1.57 billion in contributions from the state's $77.1 billion pension system for the fiscal year ending June 30.
The New Jersey Pension and Health Benefit Study Commission, appointed by Mr. Christie, announced in February recommendations that included freezing the New Jersey Pension Fund, Trenton, and creating a new cash balance plan for current and future participants.