N.J. Rating Bested by California as Christie Cuts BudgetTerrence Dopp and Brian Chappatta
New Jersey Governor Chris Christie won a battle with lawmakers over taxes and spending. The bigger war may be winning over municipal-bond investors, who for the first time since 1977 view the state as riskier than California.
Christie, a 51-year-old Republican weighing a 2016 presidential run, cut more than $1.5 billion from a spending plan approved by Democrats before signing a $32.5 billion budget yesterday. He reduced the size of his pension payment to $681 million from an initial $2.25 billion to close a deficit that opened two months before the fiscal year started today.
New Jersey has the second-lowest credit rating among U.S. states from Moody’s Investors Service, which ranks it four steps below top grade. Standard & Poor’s and Fitch Ratings have also cut the state this year. Moody’s last week raised California to the highest since 2001.
“It’s definitely at the forefront of the problem-child states, and probably moving in the wrong direction,” said Adam Weigold, who runs New Jersey funds at Eaton Vance Management, which oversees about $25 billion in munis. While “California has created and implemented a plan to reverse themselves out of that hole and have largely done that, New Jersey just can’t seem to get its act together.”
In a sign of the shifting fiscal landscape across the U.S., Moody’s last week raised California’s rating to Aa3, one level higher than New Jersey. California had to issue IOUs after the 18-month recession that ended in June 2009. Now, for the first time since 1977, the Golden State has a better grade from Moody’s than the Garden State.
New Jersey has received six downgrades since Christie took office in 2010, tying him for the most of any governor of the state. S&P and Fitch still grade the state one level higher than California. All three companies have signaled the potential for lower New Jersey ratings.
“We’re going to set a new record and it’s all happened under this governor’s watch,” said Assembly Majority Leader Louis Greenwald, a Democrat from Voorhees. “His policy of not accepting any tax increases in the name of a 30-second sound bite and his presidential aspirations isn’t working.”
Investors in the $3.7 trillion municipal market concur with the rating companies, based on the extra yield they demand to own New Jersey bonds.
The state’s 10-year general obligations yield an average 0.4 percentage point more than benchmark AAA munis, Bloomberg data through June 27 show. That spread is near the widest since January, and only Illinois, with a rating two steps lower than New Jersey’s, faces a bigger penalty on its bonds.
New Jersey’s bonds yield 0.07 percentage point more than debt from California. That’s the biggest difference in at least 18 months, Bloomberg data show.
Along with cutting the pension payment, Christie also removed money for women’s health care and earned-income tax-credit expansions from a spending plan that totaled $34.1 billion. He rejected tax surcharges on incomes above $1 million and a 15 percent increase in corporate taxes aimed at paying for the additional spending.
Christie has said public-employee unions and Democrats must agree to more changes in retirement and health plans because his 2011 overhaul didn’t go far enough to contain costs.
“We have to fix this system or it will eat us alive,” Christie said today in an interview on CNBC’s “Squawk Box.” He said he will spend July and August telling New Jerseyans of a need for more benefits changes, and “they will empower us to take action.”
New taxes aren’t the way to “resolve a fundamental structural budget imbalance or to address a legacy pension and health-benefit obligation that reflects decades of underfunding,” the governor said in a veto message.
“Punitively raising taxes on our already overtaxed residents and small business owners is not the answer to the state’s long- and short-term fiscal challenges,” he said. “I do not accept the premise that we can tax our way to prosperity in this manner.”
Democrats passed their higher spending plan even after a judge ruled in favor of Christie’s proposal to chop the required pension payment to balance his budget. Lawmakers had sought to restore the record $2.25 billion pension payment that Christie had pledged and then reneged on last month as revenue fell short amid lower-than-forecast income-tax collections.
Under a law Christie signed in 2010, New Jersey was to make higher payments to the pension system each year through fiscal 2018 to make up for a decade of skipped contributions. The funding gap fell to $36.3 billion from as high as $53.9 billion with the changes, then grew to $47.2 billion in 2012 as Christie made only partial contributions.
Missing annual required contributions “is a pretty serious shortcoming,” Weigold said. “I think they forget the ‘R’ in ARC payments means required.”
Shortfalls, credit downgrades and rising pension costs have dogged Christie this term. S&P has said the state may face a seventh downgrade if he and lawmakers can’t end recurring deficits.
“I don’t believe New Jersey has the ability to fix the pension the way it needs to,” said Roberto Roffo, who helps oversee $1.8 billion of munis at Advisors Asset Management Inc. in Princeton, New Jersey. “There are too many roadblocks right now to really reverse the trend the way California did. The political landscape is almost impossible to deal with.”
New Jersey general obligations yield less than benchmark A rated revenue bonds, Bloomberg data show. The securities don’t fully reflect the lower grade because of high in-state demand for tax-exempt interest, Weigold said. New Jersey is second only to New York in state and local tax burden, according to the Washington-based Tax Foundation.
“The market has punished them somewhat, but not like you would see in other states where demand for tax-exempt paper isn’t as high,” Weigold said. “I don’t see any serious steps being taken to turn things around.”