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Bankruptcy isn't option, but state can default Experts: Don't be fooled, N.J. isn't too big to fail

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For a Jersey guy, Gov. Chris Christie sure loves to talk about Detroit. He did it in February during his budget address. He did it again last week, after he vetoed several tax hikes intended to pay for overdue pension payments in the state budget.

“The fact is, what the 40-year-old state worker should be concerned about right now is getting reform because if they just put their heads in the sand, then we will have a Detroit-like problem in New Jersey, in Illinois, in California and lots of other states across the country,” Christie said.

Detroit's problem, Christie has said, is not the failure of making pension payments — but making unrealistic promises of them in the first place.

Similar promises have brought a stark reality to New Jersey.

And while federal bankruptcy law does not provide states with the ability to declare Chapter 9 bankruptcy — as Detroit did last year — that doesn't mean New Jersey is too big to fail.

Just because a state can't officially declare itself bankrupt doesn't mean it isn't in danger of being there.

Some may finally be listening to what Christie has been saying all along.

Patrick O'Keefe, director of economic research for CohnReznick in Roseland, said he believes New Jersey is “on a highway that if you stay on it and drive the current speed,” the inevitable destination is not Detroit, but perhaps more appropriately “default city.”

“There are exits along the way, but thus far we've chosen to ignore them,” O'Keefe said.

That's evident in a Bloomberg report last week noting that a recent upgrade to California's credit rating by Moody's Investors Service had placed the state a level above New Jersey for the first time since 1977. According to Moody's, which issued a credit downgrade to the Garden State earlier this year, New Jersey is second only to Illinois for the worst credit rating in the country.

The state also received downgrades this year from Fitch Ratings and Standard & Poor's, the latter of which followed up last month to warn the state that Christie's pension plans could bring on future downgrades.

O'Keefe said the downgrades pose a bigger threat than just bad press for the state. Interest rates grow with increased risk and investment in bonds becomes a challenge.

“That's how financial crises come to pass,” he said.

Sujit CanagaRetna, a fiscal policy manager for the nonpartisan Council of State Governments, said that many of New Jersey's fiscal obstacles are not unique to the state.

Shortchanged pension obligations, unrealistic revenue forecasts and overreliance on “one-time fixes” are some of the contributing factors to New Jersey's current situation, but they are also played out time and time again in other states, CanagaRetna said.

He said that's all in addition to a general unwillingness by politicians to raise taxes in order to meet budget demands, an approach Christie has demonstrated not just in the current budget debate, but throughout his tenure in Trenton.

“Raising taxes is so politically toxic,” CanagaRetna said.

But tax hikes are just as toxic for the state's business community, said Michael Egenton, New Jersey Chamber of Commerce senior vice president of government relations.

Egenton said the state's fiscal woes began before Christie and may well continue after him, but “good leadership” by the governor has many in the business community feeling that New Jersey can weather the storm.

That is, if everyone in Trenton is willing to come to the table, he said.

“If we don't do what the governor suggests and tackle these hard issues head-on, yeah, we could end up like a Detroit or something worse,” Egenton said.

That something worse could be California, say, circa 2010.

The Golden State, one of those comparable states Christie mentioned last week, got as close to fiscal insolvency in the past few years as any other state in recent memory, but then took “fairly dramatic actions to realign its fiscal flow,” O'Keefe said.

In issuing its upgrade to California last month, Moody's cited the state's “rapidly improving financial position, high but declining debt metrics, adjusted net pension liability ratios that are close to the state median, strong liquidity and robust employment growth.” And while noting that the state's tax structure and restrictive governmental climate remain obstacles, Moody's said it has seen “recent governance changes and proposals that are meant to address those longstanding issues.”

The agency's outlook for California is now stable and expectant of growth, but its most recent assessment of New Jersey is “negative,” with the belief that going into the next fiscal year, “solutions will be increasingly challenging.”

So, can the Garden State right the ship?

“I try to see the glass half-full,” Egenton said.

E-mail to: andrewg@njbiz.com
On Twitter: @andrgeorge


According to Moody’s, here are some of the things in California that has helped improve its rating:
Large and diverse economy: You can’t match California, but N.J. does well here.
High wealth, stronger liquidity: We know many are fleeing N.J., but the same holds true for California.
Significant improvement in budget deficits through revenue surges and conservative measures to rein in spending: That’s going to be tough.
Governance improvement leading to on-time budgets for the past three years: See previous answer.

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