New Jersey’s Bonds Downgraded for 10th Time Under Christieby
S&P cut general-obligation rating to A-, outlook is negative
State budget pressures seen intensifying in future years
New Jersey had credit ratings on about $36 billion of bonds reduced by S&P Global Ratings on expectations of worsening budget pressure brought on primarily by underfunded pension obligations.
The general-obligation rating was cut by one step Monday from A to A-, the fourth-lowest investment grade. It’s the 10th downgrade from the three major rating companies under Governor Chris Christie, the most of any New Jersey governor. New Jersey had an AA rating, the third highest level, from S&P at the start of his tenure in 2010.
"It was tough going in, but the funding levels have never been increased enough to make a difference," said Daniel Solender, head of municipals at the Jersey City-based Lord Abbett & Co., in a phone interview. "There’s a lot of pessimism about what can be done, given the tough relationship between members of the government."
New Jersey’s pension system had about $136 billion less than it needs to cover all the benefits due when workers retire, the result of the state’s more than decade-long failure to put enough money into the fund each year. Those annual payments are now soaring as the government is under pressure to pay down that debt, exerting a strain on New Jersey’s budget.
Currently, New Jersey only has 37.5 cents available to pay each $1 of benefits, according to data compiled by Bloomberg. S&P has a negative outlook on the state, indicating it could be downgraded again.
"A continuation of the current trend of declining pension funded levels could lead to diminished credit quality during our two-year outlook horizon," S&P analyst David Hitchcock said in a statement.
While the state currently plans to increase pension contributions through fiscal 2023, there is uncertainty as to whether or not it will continue to fund the pensions based on its current funding goals, S&P said. At projected funding levels, pension funding is already a source of pressure on the state’s budget, which could rise above projections, whether due to weak investment returns or revised actuarial assumptions. In S&P’s view, a continuation of the current trend of declining pension funded levels could lead to diminished credit quality during a two-year outlook horizon.
“S&P’s rating downgrade effectively amounts to another call for further pension and health benefit reforms, which the governor repeatedly has said are necessary,” Willem Rijksen, a spokesman for the state treasurer’s office, said in a statement. “Simple fact, our rating would be injured further if Governor Christie had not enacted reforms early in his administration.”
New Jersey’s 10-year bonds yield about 2.6 percent, or 0.7 percentage point more than benchmark debt. That’s the second-highest among the state’s tracked by Bloomberg after Illinois.
"Before this downgrade, they’ve been trading at levels that reflect a lower rating than they’ve had," said Solender. "Based on where market participants have been wanting to buy the bonds, they haven’t reflected in anything in the ’A’ range for a long period of time."
S&P also downgraded New Jersey’s appropriation-backed debt to BBB+ from A-, the third lowest investment grade rating; government departmental appropriation-backed debt to BBB from BBB+, and its moral obligation debt to BBB-. The credit-rating company assigned a BBB+ grade to school facilities construction bonds issued by the New Jersey Economic Development Authority.