N.J. Pension Fix Disturbing Moody’s Shows Cuts’ Limits

Governor Chris Christie’s move to reduce New Jersey’s pension payment to help close a mid-year budget gap has Moody’s Investors Service concerned that the state is approaching the limit of steps to trim spending.

The second-term Republican is cutting $694 million of spending to balance the budget for the year through June. That includes $94 million from recalculating the required pension contribution as a result of revised actuarial assumptions, Baye Larsen, a Moody’s analyst in New York, said in a report last week.

While the fix will help balance budgets through fiscal 2018, pension costs will be higher in later years as a result, according to Moody’s. New Jersey securities tend to have higher yields than those of similarly rated states because of the burden, said Daniel Solender, director of munis at Lord Abbett & Co. in Jersey City.

“This is the crowning act of gimmickry to make the budget look balanced and to undermine the soundness of the pension system,” said Bart Mosley, co-president at Trident Municipal Research in New York.

Elected officials nationwide are grappling with the cost of retirement benefits even as tax revenue recovers more than four years after the 18-month recession that ended in 2009. New Jersey has the fifth-biggest net pension liability among U.S. states, according to Moody’s, which gave the state a negative outlook in December. The state has the same outlook from Standard & Poor’s and Fitch Ratings.

Rating Cuts

The companies each cut New Jersey one level since Christie, 51, took office in January 2010, grading it three steps below top-rated munis.

Kevin Roberts, a spokesman for Christie, said by e-mail that the governor was confronting years of poor management.

“It was Governor Christie’s leadership that spurred the most far-reaching and important reforms for controlling the cost and stability of the pension system in history,” Roberts said.

Yields on an index of debt from New Jersey issuers averaged 3.31 percent on March 28, compared with 2.94 percent for Connecticut, S&P Dow Jones Indices show. S&P ranks Connecticut one level higher than New Jersey, while Moody’s grades them the same. In Moody’s 2013 ranking of state pension burdens, Connecticut placed seventh, two steps below New Jersey.

2011 Overhaul

New Jersey’s pension change will use employee contribution requirements enacted in a 2011 benefits overhaul, a move that reduces the state’s recommended payment for this fiscal year and next.

“Anything that cuts the payments is a concern because of how much there is to make up,” said Solender, whose firm oversees about $15.5 billion of local debt.

Christie’s need to “retroactively recalculate the amounts indicates that the state’s financial position is weaker than expected and that more typical budget-balancing solutions have already been exhausted,” Larsen wrote.

Chris Santarelli, a spokesman for state Treasurer Andrew Sidamon-Eristoff, said the revision follows “standard actuarial practice in using employee contributions to offset employer contributions to the pension system.” The change was analyzed by actuarial consultants and accepted by members of the public pension boards, he said in an e-mail March 25.

‘Minor Effect’

“The change in methodology has a minor effect on the funded ratio over decades and we feel that the savings in payment for the state and locals is justified,” Santarelli said.

Moody’s cited a “sluggish economic recovery” and a growing pension burden in reducing its outlook on New Jersey in December.

“The state continues to use one-time fixes that indicate above-average financial weakness,” Larsen wrote last week.

Only Illinois and California have lower Moody’s ratings among U.S. states.

Christie’s proposed $34.4 billion budget for fiscal 2015 includes a record $2.25 billion pension payment. His administration has made contributions totaling $5.3 billion, more than double the $2.4 billion put into the system in the prior 10 years, Santarelli said.

New Jersey’s pension deficit reached $53.9 billion in 2010 after the state expanded benefits and skipped payments over a decade. The gap fell to $36.3 billion after Christie signed bills to boost employee pension and health-care contributions, raise the minimum retirement age for new workers and freeze cost-of-living adjustments. It rebounded to $47.2 billion as of July 1, 2012, as Christie made only partial contributions.

Christie, a potential 2016 presidential candidate, said in February that the pension deficit had since climbed to $52 billion. He said his benefits overhaul didn’t go far enough, and he is seeking another round of cost cutting.

To contact the reporters on this story: Elise Young in Trenton at eyoung30@bloomberg.net; Romy Varghese in Philadelphia at rvarghese8@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, Mark Schoifet

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