Fitch lowers New Jersey debt rating, outlook

Fitch Ratings downgraded New Jersey's general debt one notch to A-minus from A and lowered the firm's outlook to negative from stable, citing the impact of COVID-19, long-standing "structurally imbalanced financial operations," and its "persistent underfunding of liabilities."

Fitch, in a report issued Tuesday, said the state benefits from a "diverse, high-wealth economy" that provides a "long-term positive credit factor."

However, the ratings also reflect "the constraints posed by incremental pension contribution increases that are expected to continue, crowding out other state priorities and absorbing natural revenue growth," the report said.

"The lack of meaningful reserves necessitates a search for outside liquidity support and the scale of the estimated budgetary impact is significant, absent additional federal assistance," the report said.

As for lowering the outlook to negative, the Fitch report said the firm "expects the direction of the state's credit quality to become clearer only after the immediate health crisis subsides and as the outlines of the recession and the effectiveness of the state's fiscal responses come into view."

The Fitch report's credit concerns are similar to those made by Moody's Investors Service last week. Moody's lowered its outlook to negative from stable but retained the existing A3 bond rating.

"The A3 rating reflects New Jersey's large, diverse and wealthy economy offset by significant long-term liabilities and the multiyear burden of rapidly rising pension contributions, which are the result of significant historic pension underfunding," a Moody's report said.

The Fitch report said, "Carrying costs are already well above the U.S. state average and the state's appropriation for pension contributions is just 70% of its actuarially determined contribution for fiscal 2020."

Gov. Phil Murphy recently signed a law extending the state's current fiscal year to end Sept. 30 rather than June 30. The 2021 fiscal year, for which the state contribution is supposed to be 80% of the actuarially determined contribution, starts Oct. 1 and ends June 30, 2021.

"Given the need to fund sizable and increasing pension and other post-employment benefit expenditures, the natural growth in expenditures is expected to be well above future revenue growth absent offsetting policy actions," the Fitch report said.

New Jersey is scheduled to contribute $3.75 billion to the state pension system for the current fiscal year — a combination of general revenue funds and lottery proceeds — and $4.6 billion for the next fiscal year. The state has made three full quarterly payments for the current fiscal year.

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