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New Jersey’s Rating Lowered to A+ by S&P Amid Budget Imbalances

New Jersey State House
The New Jersey State House stands in Trenton, New Jersey. New Jersey’s credit rating was lowered to A+ by Standard & Poor’s. Photographer: Ron Antonelli/Bloomberg

April 10 (Bloomberg) -- New Jersey’s credit rating was cut one step to A+ by Standard & Poor’s, which cited one-time measures to plug budget deficits that will add to fiscal pressure.

The downgrade puts the state’s credit four levels below the top, and leaves it with California and Illinois in the single-A category, lower than 47 other states. The New York-based company gave New Jersey a stable outlook.

The state had $2.4 billion of general-obligation debt and $32.6 billion of bonds subject to annual legislative appropriation as of June 30. S&P lowered the appropriation debt to A, one level below the general obligations.

Governor Chris Christie’s revenue projections have missed actual collections for three straight years. To help close a mid-year budget gap, the governor is using $94 million from recalculating the required pension contribution for fiscal 2014, which ends June 30.

“Almost five years after the official start of the economic recovery, New Jersey continues to struggle with structural imbalance and stands in stark difference to many of its peers who registered sizeable budgetary surpluses in fiscal 2013,” John Sugden, an S&P analyst, wrote in a report yesterday.

Risk Remains

S&P said it may downgrade New Jersey further if revenue continues to miss projections or if the state keeps resorting to temporary budget fixes.

“Should revenue growth forecasted for fiscal 2014 and fiscal 2015 fail to materialize, further increasing the state’s reliance on one-time measures and deferring pressures into future budgets, there could be additional downward pressure on the rating,” Sugden wrote.

The state plans to sell $197.5 million of revenue bonds through its Educational Facilities Authority, according to an offering statement dated April 9. S&P gives an A grade to the bonds, which will be repaid through yearly legislative appropriations. Proceeds will finance capital projects at higher education institutions and refinance debt, according to bond documents.

Christie’s budget plan for the fiscal year beginning July 1 includes a record $2.5 billion pension payment that crowds out other spending. He has said the legislature needs to pass changes to the retirement system beyond measures enacted in 2011, which increased the retirement age and boosted public workers’ contributions.

$47 Billion

“How long do you all think we can keep this up?” Christie said yesterday in a town hall meeting in Fairfield.

The pension system is underfunded by $47 billion, and any revenue growth is consumed by such obligations, he said.

“Do you all really believe we’re going to grow out of that problem? It doesn’t make any sense.”

Municipalities nationwide are grappling with the cost of retirement benefits even as tax revenue recovers more than four years after the recession that ended in 2009. New Jersey has the fifth-biggest net pension liability among U.S. states, according to Moody’s Investors Service.

This is S&P’s second downgrade of New Jersey since Christie, 51, took office in January 2010. Moody’s and Fitch Ratings each cut the state one level in that period, and give it a negative outlook. Moody’s rates the state Aa3 and Fitch assigns it AA-, both three steps below the top.

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

S&P’s move yesterday “actually underscores what the governor has been saying since January,” Kevin Roberts, a spokesman for the second-term Republican governor, said in an e-mail. “The rising costs of pension, health benefits and debt service challenges our long-term fiscal health, and requires further reforms.”

Debt from New Jersey has earned 4.4 percent in 2014, beating the 4 percent advance for the broader municipal market, S&P Dow Jones Indices show.

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

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

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