Moody's Investors Service cut New Jersey's general obligation bond rating by one notch due to “the continued negative impact of significant pension underfunding, including growth in the state's large long-term liabilities, a persistent structural imbalance and weak fund balances,” the firm said.
Cutting the rating to A3 from A2 affects approximately $37 billion in debt, Moody's said in a report Monday. The outlook on the revised rating is stable. New Jersey remains in the “upper-medium grade” category of Moody's rankings, although A3 is the lowest rung in that category.
“Despite the state's significant increases in pension contributions since fiscal 2012, contributions remain well below the actuarial recommended contribution and unfunded pension debt continues to grow,” the report said.
Gov. Chris Christie's budget for the fiscal year starting July 1 calls for a $2.51 billion state contribution to the $71.2 billion New Jersey Pension Fund, Trenton. The contribution for the current fiscal year is $1.86 billion.
Moody's said maintaining annual statutory pension fund contributions “will be increasingly difficult to meet given the lack of structural budget adjustments” and “the state's reliance on optimistic revenue growth assumptions to balance the budget.”
The “budget adjustments” cited by the firm was the signing of a law by Mr. Christie that took effect in January providing tax cuts to offset an increase in the state's gasoline tax to replenish the state's transportation trust fund. The gas-tax income can only go to the transportation fund; the tax cuts come out of the general budget from which state pension plan payments are made.
“Without balancing actions, the recent tax cuts will reduce revenues by $1.1 billion by fiscal 2021 and strain the state's ability to resolve its large structural imbalance in the near term,” Moody's said.
The firm noted that the stable outlook “reflects that the current A3 rating is well positioned for the next 12-18 months due to solid economic performance and the expectation that any fiscal 2017 budget gaps will remain manageable.”
However, over the long term, “the state's credit profile will continue to weaken as large long-term liabilities grow and the state's budget is challenged by growing pension contributions in a low-revenue-growth environment,” the report said.