S&P Global Ratings raises outlook on New Jersey

S&P Global Ratings raised its outlook to positive from stable for New Jersey, while maintaining its BBB+ on the state's general obligation bonds and BBB rating for other bonds secured by annual state appropriations.

"The outlook revision reflects our view that the decisions made by the state on how to spend surplus revenues in fiscal years 2021 and 2022 could position New Jersey to materially improve its long-term liability profile," S&P Global Ratings credit analyst Tiffany Tribbitt said Tuesday in a news release.

The release pointed to "efforts to improve pension funding," noting that it "could result in maintenance of a combined funded ratio of more than 40%, which we consider supportive of a higher rating," the news release said.

The state's combined pension funded ratio was 38.4%, according to Governmental Accounting Standards Board reporting as of June 30, 2020, the most recent available, the news release said. The New Jersey Pension Fund, Trenton, had assets of $92.7 billion as of May 31.

The BBB+ general obligation bond rating reflects several weaknesses, the firm said.

They include "a large structural operating deficit, which we calculate at 9.5% of appropriations in fiscal 2022," the news release said.

Other weaknesses are "a large unfunded pension liability, a low pension funded ratio and a history of substantially underfunding the state retirement systems' annual actuarially determined contribution," the news release said.

S&P also cited "large OPEB obligations" and a "high debt burden." OPEB, or other post-employment benefits, primarily reflects health-care costs.

S&P said the weaknesses are offset by the state's high per capita income, a diverse economic base and "good" budget reserves, the news release said.

The S&P action follows the July 13 decision by Moody's Investors Services to raise its outlook to positive from stable and to retain its A3 rating on the state's general obligation debt.

"The revision to the positive outlook reflects the state's better-than-expected financial position and improved governance profile that will enhance budget flexibility during the coronavirus recovery," Moody's July 13 news release said.

"The state has responded to a brightening revenue and liquidity picture with several actions reflecting a recent commitment to addressing more aggressively its liability burdens, demonstrating improved fiscal governance and management," the release said. "These actions include debt reduction and avoidance and acceleration of pension contributions."

On July 1, the first day of the current fiscal year, New Jersey paid most of its fiscal year 2022 contribution to the state's pension system in a $5.8 billion lump sum, rather than make traditional quarterly payments. The state also expects to contribute an estimated $1.1 billion to the pension system from state lottery proceeds, bringing the fiscal year total contribution to $6.9 billion. The lottery-based payments will be made monthly.

The state's contribution to the pension system — general revenue plus lottery proceeds — was $4.8 billion for the fiscal year ended June 30, 2021.