Christie Poised to Match Record for New Jersey Downgrades
Chris Christie is at risk of matching the record of six New Jersey bond downgrades under former Democratic Governor James McGreevey as ratings companies pan the second-term Republican’s revenue forecasts.
Fitch Ratings and Moody’s Investors Service give New Jersey negative outlooks, meaning more cuts are possible as the state’s economic rebound trails the nation’s. Fitch’s cut this month brought the tally of downgrades under Christie to five. Only California and Illinois have lower grades among U.S. states.
Christie, 51, took office in 2010 pledging to end years of Democratic bungling of state finances and fix a pension system heading toward insolvency. His administration has overestimated revenue projections for three straight years, necessitating one-time measures to close mid-year gaps. With less than two months left in the fiscal year, he faces an $807 million hole.
“Not every state got it so wrong on revenues,” said Lucy Dadayan, a senior policy analyst at the Nelson A. Rockefeller Institute of Government in Albany, New York.
Christie isn’t alone in seeing revenue growth falter. States’ personal income-tax collections last quarter rose by an “insignificant” 0.7 percent from a year earlier, according to the institute. It was the skimpiest increase since the same period in 2010, the group said, citing preliminary data from 46 states.
The governor’s disclosure on April 28 of the latest revenue shortage brought the full-year gap to $1.06 billion, or 3.2 percent, below the original $33 billion budget, according to an April 30 report by Baye Larsen, a Moody’s analyst.
While Moody’s stopped short of a downgrade, Larsen called the shortfall “credit negative” because Christie would probably use one-time measures to close it. He’s already gone that route this year, through steps such as shrinking New Jersey’s pension payment by reducing the actuarial assumption.
“The rating agencies almost uniformly agree with what the governor has been saying,” Kevin Roberts, a Christie spokesman, said in a May 6 e-mail. “The costs of pension, health benefits and debt service challenge our long-term fiscal health, and require further reforms.”
Chief executives of other states have also received multiple downgrades during their terms. In Illinois, which has the worst-funded U.S. state pension system, Democratic Governor Pat Quinn has seen 13 cuts since taking office in 2009.
McGreevey, governor from January 2002 through November 2004, relied on borrowing to balance the budget. In his final year in office, the state Supreme Court banned bond sales to fund operating expenses.
In 2004, he signed a bill raising taxes on those earning more than $500,000 a year. The measure, designed to support property-tax relief, was dubbed “the millionaire’s tax.”
“We did the millionaire’s tax, and that mitigated it,” McGreevey said by telephone. The 56-year-old, who counsels prisoners on workforce re-entry and leads a jobs program for Jersey City, declined to comment further on downgrades during his administration. He said he was “no longer in the politics business.”
The first Republican elected New Jersey governor since 1997, Christie staked a potential 2016 presidential run on a reputation for checking spending. He has said his job was to be “the adult in the room” in a state where Democrats borrowed or raised taxes to solve budget deficits.
In his first term, Christie got Democrats who control the legislature to raise the retirement age for public workers as well as those employees’ contributions to pensions and benefits. He vetoed taxes on higher earners, while cutting levies for businesses. Christie lost a battle for a 10 percent income-tax cut as revenue failed to meet his targets.
The governor said April 30 that “nothing is off the table” as his administration closes the latest gap. Most of the shortfall is because of a $700 million drop in income-tax collections. He blamed federal tax increases that led high earners to accelerate payments.
Neighboring Pennsylvania is also seeing revenue trail estimates for this fiscal year. Collections through April were $425 million, or 1.7 percent, below projections.
Fitch cited the size of New Jersey’s shortfall and its disclosure so late in the fiscal year ending June 30 when it cut the state on May 1 to A+, fifth-highest. It was the second Fitch reduction during Christie’s tenure. Standard & Poor’s has also lowered New Jersey twice in that period and Moody’s dropped it once, to Aa3, a step above S&P and Fitch.
“It’s time for the governor to take off the rose-colored glasses, stop bragging about fantasy balanced budgets and produce a realistic and responsible spending plan,” said Senator Paul Sarlo, a Democrat from Wood-Ridge who chairs the budget panel.
In the $3.7 trillion municipal-bond market, a falling credit grade has helped bolster New Jersey securities. With benchmark yields are at 11-month lows, investors are favoring lower-rated bonds in 2014. Borrowings from New Jersey have earned 5.4 percent this year, sixth-best of 27 states tracked by S&P Dow Jones Indices.
“If it were a tougher environment, there probably would be more of an impact from the ratings moving the way they’re moving and from the negative outlooks,” said Daniel Solender, director of munis at Jersey City, New Jersey-based Lord Abbett & Co., which manages $15.5 billion of state and local debt. “They’re being saved by rates being low.”
New Jersey in fiscal 2013 had $465 million in its surplus fund, the fourth-lowest among U.S. states, according to Pew Charitable Trusts. The figure represented 1.5 percent of spending, according to a report last month from Pew, a Washington-based non-profit group that studies public policy.
The rainy-day projection for 2015 is even less. For the year beginning July 1, Christie projects a $313 million surplus, less than 1 percent of spending.
“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 an April 9 report.
The state’s 7.2 percent jobless rate in March exceeded the 6.7 percent U.S. average, and compared with 6.9 percent in neighboring New York and 6 percent in Pennsylvania.
Christie’s $34.4 billion budget plan for next fiscal year includes a record $2.5 billion pension payment. According to his figures, more than 90 percent of new spending goes to pensions, health benefits and debt payments.
The governor said in February that the pension was underfunded by $52 billion after a decade of expanded benefits and missed payments. Democratic lawmakers and public-employee unions must agree to changes in retirement and health plans because his 2011 overhaul didn’t go far enough, he said.
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