"The state has demonstrated a recent commitment toward restoring and maintaining actuarially sound annual pension contributions and has dedicated budgetary windfalls toward paying down long-term liabilities and bolstering reserves rather than toward recurring spending, which has supported its financial flexibility," said a Kroll report issued May 1."The current administration has placed a high priority on improving the State's overall fiscal health and current reserve levels provide a large cushion to manage future budgetary challenges," the report said.
However, the state "has yet to demonstrate its commitment to sustaining full actuarial pension contributions and reserves on an ongoing basis, and these risks continue to be incorporated at the revised rating level," the report said.
The risks of a ratings downgrade include underfunding pension contributions, a "significant diminution of reserves to balance financial operations," and "deteriorating" economic conditions, the report said. "Consistency in and commitment to both pension funding and reserve maintenance through the full economic cycle will be integral to maintenance of the rating."
Gov. Phil Murphy's proposed budget for the fiscal year starting July 1 contains a full actuarial state contribution to the New Jersey pension system. If the budget is approved by the legislature, it would mark the third consecutive fiscal year of a full actuarial pension contribution to the $87.5 billion New Jersey Pension Fund, Trenton.
The state contribution for the fiscal year ending June 30 of $6.82 billion is equivalent to 104% of the actuarially determined contribution (ADC), the Kroll report said. The proposed fiscal 2024 budget includes full funding of $7.09 billion, also 104% of the actuarially required amount.
"Funding requirements remain subject to investment performance and revisions to actuarial assumptions, but based on currently available information, the state has completed its pension funding ramp and is expected to be in a position to fund full ADC payments on a more level basis going forward," the report said.
Kroll also reduced its New Jersey outlook to stable from positive, citing the "improvement in the state's financial picture, including the restoration of full actuarially based annual pension contributions and improved reserves," the report said.
The outlook is based on Kroll's "expectation that lawmakers and the current administration will leverage the state's broad and diverse economy and recent historic surpluses to prudently manage the state's finances through the economic cycle while maintaining full actuarial pension contributions and prudently managing countercyclical reserves."