New Jersey bond outlook cut to negative – S&P Global

Updated with correction

S&P Global Ratings on Thursday cut its outlook to negative from stable for New Jersey's general obligation bonds, the third major ratings agency to take such action this month. The firm maintained the state's bond rating of A-minus.

Fitch Ratings lowered its outlook to negative from stable on April 21, while also cutting the general obligation bond rating one notch to A-minus from A.

On April 13, Moody's Investors Service changed its outlook to negative from stable, while retaining its A3 rating on the state's general obligation bonds.

"New Jersey's economy and high income could support a higher rating, but high debt, high other post-employment benefits and the nation's worst funded pension system are reflected in a rating well below the median for the state sector," S&P Global said in its report.

"The low pension funded ratio is the result of decades of underfunding the state's annual pension contributions," the report said.

The S&P Global report speculated that there is a "significant possibility" that the state will reduce its annual contributions to the state pension system "or delay the scheduled contribution increases because of the current recession."

The state is scheduled to pay $3.75 billion to the pension system — a combination of money from general revenue and the state lottery. The state has made three regularly scheduled payments of $684 million for each quarter. State officials haven't commented on the fourth quarter payment originally due June 30.

Gov. Phil Murphy recently signed a law extending the end of the current fiscal year to Sept. 30 from June 30, citing the economic damage and uncertainty caused the coronavirus pandemic.

Meanwhile, state lottery proceeds were $707.8 million for the nine months ended March 31, or 12.1% below the same period last year.

The state relies on the lottery to produce about $1 billion a year towards the total state pension contribution. A shortfall would require more general revenue money to meet the $3.75 billion goal.

During the current fiscal year, the state was expected to contribute 70% of the actuarially required amount to the pension system. For the next fiscal year, Gov. Murphy had recommended a state contribution of $4.6 billion, or 80% of the actuarially required amount.

"In our view, there is at least a 1 out of 3 chance we could lower the general obligation bond rating within the next year," the S&P report said. The key factors will be "the magnitude of the ongoing revenue loss" and a "long-term structural mismatch between ongoing revenues and expenditures."

The New Jersey Pension Fund, Trenton, had $74.2 billion in assets as of Feb. 29, according to latest available data.