As the ink dries on Gov. Phil Murphy’s first signed state budget, it will bear watching how New Jersey’s credit ratings – currently the second worst in the U.S. – will fare.
Wall Street credit rating agencies Moody’s, Fitch and Standard & Poor’s have yet to offer fresh financial forecasts for New Jersey following its passage of a $37.4 billion spending plan. But if their reactions since Murphy first floated his fiscal 2019 budget are any indication, New Jersey’s credit ratings – lowered 11 times under former Gov. Chris Christie – may simply tread water.
Back in March 2017, Moody’s lowered New Jersey’s rating from A2 to A3 with a stable outlook and a December report maintained that rating. Fitch has New Jersey rated at A- “stable,” while S&P has the state at A “stable.”
“The stable outlook that was assigned pretty much says that the state’s rating should stay where it is for the next 12 to 24 months,” Moody’s spokesperson David Jacobson said.
Over the years, the rating agencies have cited the state’s pension liability, underfunded by upward of $100 billion, as the basis for a succession of credit downgrades.
A December report by Moody’s cited low budget reserves and structural imbalances in maintaining its A3 rating.
Murphy’s budget calls for $3.2 billion toward the state pension, or just 60 percent of what the state should be paying in fiscal 2019.
“There’s good news and bad news, and it’s the same,” S&P credit analyst David Hitchcock told NJBIZ recently. “They have 60 percent [of the pension obligation], so that’s the highest percent in 20 years that the state has actually contributed. … But the bad news is it’s only 60 percent, and it’s far short of what would be needed.”
The fiscal 2019 budget may be deemed sufficiently neutral in its impact on the state’s financial well-being that S&P won’t change its rating, Hitchcock said. But, he added, an abundance of short-term revenue mechanisms in the budget is a point of concern.
“Every state has a certain degree of one-shot budget items; maybe it’s 1 percent of the budget, or maybe it’s significantly more in a time of recession,” Hitchcock said. “If there’s some extra revenue available, we don’t blame the state necessarily. We consider it prudent to take one-time revenues and use it for one-time expenses, not ongoing expenditures.”
In the month before the budget deadline, Murphy decried the Legislature’s budget as full of “one-shot” and “two-shot gimmicks.” But in the end, he signed a budget in which almost half of the $1.5 billion in revenue increases will expire within four years.
For one year, the state will bring in $200 million from a one-time, 90-day tax forgiveness program and another $200 million from a one-time tax on money New Jersey corporations choose to move back to the state as a result of the Trump tax cuts. The corporate business tax, a central piece of the budget debate, will last four years.
“I think the state is clearly aware of the … budget challenges that have affected their credit quality,” said Douglas Offerman, a senior director at Fitch Ratings. “That includes the reliance on one-time revenue, the relatively limited cushion to absorb negative surprises, economic hiccups, and that includes certainly the enormous costs — legacy costs — that the state carries.”
Offerman declined to speculate on new ratings, saying to do so “would be stepping into territory that our credit committee would have to have a view on.” He said it could take at least a month to release a forecast.
“There’s a whole administrative framework around that,” Offerman said. “You go from a signed budget to something that is carried out by the administration of the state. It takes a while.”