N.J. Outlook Fails to Improve as Pension Hit Looms: Muni CreditElise Young and Michelle Kaske
Governor Chris Christie, who says rising pension and debt payments threaten to crowd out spending on services such as public safety, risks a ratings cut as New Jersey debates how to tackle unfunded retirement liabilities.
Christie in a Feb. 3 radio interview said he will “work with actuaries to make the appropriate payment” on pensions for next fiscal year, though he said the state can’t afford both the $2.4 billion bill and funding for health care, education and public safety. As the second-term Republican prepares to introduce his next spending plan on Feb. 25, he must contend with revenue that is trailing targets.
New Jersey’s net pension liability is fifth-highest among U.S. states, according to Moody’s Investors Service, which cited the expense in giving the state a negative outlook in December. Investors are waiting to see how the budget trade-off plays out. Anything that weakens pension-funding levels may raise borrowing costs, said Clark Wagner, director of fixed income at First Investors Management Co.
“An unfunded pension is a big issue, so they have to take care of that,” said New York-based Wagner, whose firm manages $1.5 billion of munis. “That’s probably the most important issue for investors.”
New Jersey, with a pension fund market value of $76.8 billion, isn’t alone in balancing spending needs with worker retirement costs after the 18-month recession that ended in 2009. States’ median pension-funding ratio fell to 69 percent in 2012, from about 83 percent five years earlier, according to data compiled by Bloomberg.
On Dec. 17, Moody’s reduced New Jersey’s outlook to negative from stable, citing a sluggish recovery’s drag on revenue and the “pressure of statutorily scheduled pension contribution increases.” Standard & Poor’s also gives New Jersey a negative outlook.
The major credit-rating companies each dropped New Jersey one level since Christie, 51, took office in January 2010, ranking the state three steps below top-rated munis. Only Illinois and California have lower Moody’s ratings among U.S. states.
Yields on New Jersey securities tend to be higher than those of similarly rated states because of the liability, said Daniel Solender, director of munis at Lord Abbett & Co. in Jersey City, New Jersey, which oversees $15 billion of local debt.
Average yields on an index of debt from New Jersey were 3.34 percent on Feb. 7, compared with 2.93 percent for Connecticut bonds, S&P data show. S&P grades 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.
As revenue figures last month showed fiscal-year collections trailing Christie’s forecast by 3 percent, the governor backtracked on a theme he had driven home at more than 100 town-hall meetings during his first term: that New Jersey is heading toward prosperity on his corporate tax incentives and government cost-cutting.
“For the fiscal year 2015 budget, the increase in pension and debt-service costs could amount to as much as nearly $1 billion,” Christie said Jan. 14 during his State of the State address in Trenton. The result, he said, was that much less money for investment in education, public safety and health care.
“We simply cannot afford to do it right now,” he said of increasing payments to those areas, and called for “further changes” to address rising pension and debt costs.
Christie signed a law in 2011 requiring the state to make one-seventh of its pension contribution in fiscal 2012 and then raise the payment each year until it reaches the full annual amount in 2018.
The governor will work with lawmakers on “achieving the proper balance between funding the pension system and budgetary decisions,” and will present specifics during the budget address, Michael Drewniak, a spokesman, said in an e-mail.
Amid Christie’s preparation for budget negotiations, his administration is the subject of state and federal probes of ties to politically motivated traffic jams at the George Washington Bridge and the use of Hurricane Sandy relief funding.
The governor has denied knowledge of the bridge plot and has said Sandy money was spent appropriately. Forty-six percent in a Washington Post-ABC News poll from Jan. 20 to 23, though, said the bridge matter was a “sign of broader problems” within his administration.
A January poll by Hamden, Connecticut-based Quinnipiac University found that former Secretary of State Hillary Clinton, a Democrat, moved ahead of him in a possible 2016 match-up by 46 percent to 38 percent among voters. The two were essentially tied in December.
Democrats at home, who are leading a legislative inquiry on the bridge matter, are pushing for the retirement funding.
“I expect to see the pension payment in the budget,” Senate President Stephen Sweeney said in a Feb. 3 interview in his Trenton office. Without it, the Democrat said, he’ll shut down state government on July 1, the start of the fiscal year. His party controls the legislature.
New Jersey’s pension-fund payment due in 2015 is 41 percent greater than this year’s $1.7 billion commitment. By 2018 the state share is set to balloon to $5 billion -- almost 20 percent of this year’s $31.7 billion state budget -- under the 2011 legislation, which Christie hailed as a turn toward fiscal responsibility.
The 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 that boosted employee pension and health-care contributions, raised the minimum retirement age for new workers and froze cost-of-living adjustments. It rebounded to $47.2 billion as of July 1, 2012, as Christie made only partial contributions.
“The further you fall behind on pensions, the more it costs to catch up,” Solender said.