New Jersey’s fiscal pressures, caused by rising pension and benefit costs that threaten to consume a quarter of the budget by next year, are seeping into cities and colleges at risk of losing more than $1.5 billion in state aid.
Moody’s Investors Service has cut New Jersey’s credit rating and placed seven localities and 11 universities under review for possible downgrades since Governor Chris Christie proposed his budget in February. Citing the potential for less aid, the company dropped Trenton one level on April 20, prompting the state capital to delay a bond sale.
Cities such as Newark and Asbury Park may have budget crises of their own if judges’ rulings force Christie to put $3.4 billion more into the state’s pensions this year and next. The Republican governor said he doesn’t have the money to make the contributions, which would require him to cut spending elsewhere as he rejects Democrats’ higher taxes.
“There’s too many needs out there and not enough dollars,” said Paul Mansour, head of municipal research at Hartford, Connecticut-based Conning, which oversees about $11 billion in munis. “It’s sad but I don’t see these types of cities, unless there’s some large private investment involved, pulling themselves up and getting back to structural balance any time soon.”
Christie was sued by New Jersey unions that are seeking to prevent him from shortchanging their pension funds to help close a state budget shortfall. The governor’s attorneys are scheduled to appear in state courts in May to defend decisions to pay $681 million of a planned $2.25 billion pension payment this fiscal year, and $1.3 billion of $3.1 billion for the year starting July 1.
“Moody’s recent state downgrade is almost entirely related to funding the state’s long-term pension liabilities and is heavily influenced by pension litigation pending before the state Supreme Court,” Christopher Santarelli, a spokesman for the state treasury, said in an e-mail.
New Jersey on April 16 had its credit rating cut one level by Moody’s to A2, the sixth-highest rank, giving Christie, 52, a record nine downgrades.
Ten-year New Jersey bonds yield 2.95 percent, the highest since February 2014 and 0.8 percentage point above benchmark munis, according to data compiled by Bloomberg. The gap has doubled in the past year and is higher than for any state except Illinois.
Christie gained national fame during his first term for assailing the cost of employee benefits and winning Democratic approval for cuts. This year, he has called for the state to freeze its pension system and place all future employees into a 401(k)-style defined contribution plan. Democrats refuse to consider such moves unless Christie makes full pension payments.
“The governor has advanced pension and health benefits reforms that would stabilize pensions and allow the state to make its contributions in a sustainable way,” Santarelli said.
Four days after the New Jersey downgrade, Moody’s lowered Trenton’s rating. In March, Moody’s said it’s also reviewing Asbury Park, Kearny, Newark, Paterson, Union City and Weehawken, citing the state’s “constrained” finances and the risk of funding cuts. New Jersey awarded $115.6 million of transitional aid to distressed cities this year.
Moody’s also placed all 11 public New Jersey universities, with a $1.45 billion share of the budget, under review.
Trenton canceled a $17.8 million refinancing April 23 because it anticipated that investors would demand higher interest rates after the downgrade, which cut into the expected savings.
Trenton bonds maturing in February 2021 traded April 24 at an average yield of 2.18 percent, or 0.74 percentage point above benchmark munis. That compares with an average gap of 0.85 percentage point since January, Bloomberg data show.
The city is trying to lessen its dependence on state aid, said Terry McEwen, the business administrator. In the downtown, it’s studying whether it could raise revenue by replacing parking meters with more cost-efficient kiosks.
Paterson may charge fees for street festivals and parades to cover policing and clean-up costs. That’s one stipulation of its $25 million transitional aid from Christie’s administration.
Paul Brennan, a money manager in Chicago at Nuveen Asset Management, which oversees about $100 billion of munis, said most New Jersey municipalities remain “pretty solid credits.”
“Overall the state is very wealthy with a lot of resources in aggregate with pockets of some bad situations,” Brennan said.