Heading into the final days of its fiscal year, New Jersey is a state of disagreement about the funding of the $79.2 billion New Jersey Pension Fund, Trenton, and a state of concern for credit-rating agencies.
Because the pension system — and its chronic underfunding — play such a prominent role in the state’s budget and credit reputation, executives at rating agencies say the governor and Legislature must do something significant and long-lasting, or face the risk of more credit-rating downgrades and higher borrowing costs.
“The longer they wait, the pension funding will deteriorate rapidly,” said Baye Larsen, vice president and senior analyst at Moody’s Investors Service Inc., New York, said in an interview.
Like other analysts, Ms. Larsen decried New Jersey’s continuing use of “one-shot” strategies to enact a balanced budget. That’s one reason Moody’s in April cut the state’s general obligation bond rating to A2 with a negative outlook. (Illinois is the worst-rated state with an A3 rating and a negative outlook).
One example of New Jersey’s structural weakness vs. other states is the Moody’s calculation called adjusted net pension liabilities, which “adjusts reported liabilities by discounting at a bond market interest rate and making estimated allocations of multiple-employer cost-sharing plans,” said a Moody’s report issued in November. The latest data - for the 2013 fiscal year - shows New Jersey’s ANPL was 179.7% of state governmental revenue, or fourth worst. The median is 60.3%.
“Lower is better,” said Ms. Larsen, adding that she expects New Jersey’s score will be about 250% for the 2014 fiscal year.
New Jersey must achieve a “structural balance” in which recurring revenues match recurring expenses, she said. Without structural improvements, including pension reform, the imbalance will grow and the state will face further bond-rating downgrades, she said.
In the short-term, however, one certainty is that New Jersey has to pass a balanced budget by June 30, as required by the state constitution, for the year starting July 1.
Republican Gov. Chris Christie’s budget contained a pension payment of $1.3 billion compared to the $3.1 billion approved June 25 by the Democrat-controlled Legislature.
On June 26, the governor used his line-item veto to impose the smaller payment while also rejecting new taxes on wealthy individuals and businesses that would have helped make the higher payment.
The dispute between the governor and the Legislature was a replay of last year. Mr. Christie had promised to make a payment of $2.25 billion for the fiscal year ending June 30, 2015, but he cut it to $681 million. The Legislature approved a budget containing the higher payment and some additional taxes, and Mr. Christie used his line-item veto on both. (On June 26, Mr. Christie added $212 million to the $681 million thanks to higher than expected revenue in the final months of the current fiscal year.)
“We need them to work together,” said Marcy Block, senior director for Fitch Ratings, New York, referring to the governor and the Legislature.
Ms. Block, who tracks New Jersey, said her firm’s most recent comparison of states’ public finances, published in March, gave New Jersey an A rating and a negative outlook — second worst only to bottom-dweller Illinois.
In the report, Fitch Ratings expressed “concern that state actions to address near-term budgetary challenges may fail to address the longer term structural and liability challenges.”
Standard & Poor’s Corp. also places New Jersey — with an A rating — just ahead of last-place Illinois with an A-minus rating.
One attempt at structural changes in New Jersey came from the New Jersey Pension and Health Benefit Study Commission, a panel appointed in August 2014 by Mr. Christie. In February, the commission issued recommendations — many of which would require legislative approval — that included freezing the existing pension plans and creating new retirement plans such as a cash balance plan. A centerpiece of the commission’s reform is a constitutional amendment to ensure a consistent, predictable funding of the pension system.
A constitutional amendment “would not allow future governors of either party to withhold payments,” said Thomas J. Healey, chairman of the commission, in an interview. “The problem now is that there is no accountability.”
The proposed constitutional amendment “is the carrot that makes it (the commission’s other suggestions) attractive to the unions,” said Mr. Healey, partner in Healey Development LLC, Morristown, N.J., and a former assistant secretary of the U.S. Treasury for domestic finances under President Ronald Reagan.
To get a constitutional amendment on the November ballot, legislators would have to act by August. “If the amendment doesn’t work, everything else unravels,” said Mr. Healey.
Even with the commission’s recommendations, New Jersey has a daunting task to repair its pension system and to improve its budgeting process to which the pension system is inextricably linked.
“If you keep borrowing money and keep underfunding the pension system, it catches up with you,” said Richard Ravitch, a board member of the Volcker Alliance, a non-profit group chaired by Paul Volcker, former chairman of the board of governors of the Federal Reserve System.
“The fundamental problem is that you need sufficient revenue to keep the promises you made,” said Mr. Ravitch.
The Volcker Alliance studies ways to improve the fiscal health of states and local governments, and it recently issued a report that sharply criticized New Jersey’s budgeting process.
“For decades, governors of both parties have balanced New Jersey’s budgets by declining to put aside the amount of money actuaries say is necessary, on an annual basis, to ensure that the state will be capable of covering future promised benefits,” said the June 8 report.
New Jersey has balanced budgets by “shifting resources intended for other programs to the general fund and increased its reliance on borrowing,” the report said. “Repeated optimistic revenue forecasts have resulted in midyear adjustments that are not subject to the usual legislative budgeting process.”
The report also noted Mr. Christie’s decision in the 2014 fiscal year to make a state payment to the pension fund of $696 million instead of the promised $1.58 billion as well as the governor’s reducing the promised payment for the 2015 fiscal year.
“These further deferrals will make it even more difficult for future budgets to accommodate the needed pension payments,” the report said.
The governor’s withholding of some payments for the 2014 and 2015 fiscal years have survived court challenges by unions.
The unions are suing Mr. Christie over the 2016 fiscal year pension payment. This case is pending with no oral arguments scheduled.
