Rating Agencies Deal Fresh Blows to New Jersey, Illinois

Credit rating agency Fitch has downgraded New Jersey’s municipal bonds for the second time this year, citing continued deterioration of the funding levels of the state’s pension funds.

The bonds have been cut from A+ to A, leaving them among the worst-ranked municipal bonds in the US.

“Fitch believes balancing the need for requisite pension system contributions with other long-term demands… will continue to prove difficult.”—Fitch RatingsNew Jersey has “above average” outstanding debt obligations, Fitch said, which include contributions to the state’s public employees’ retirement system (PERS) and the teachers’ pension and annuity fund (TPAF). At the start of July 2013, New Jersey said PERS was 62% funded while TPAF was 57% funded. But Fitch, using a more cautious valuation assumption, said the levels were roughly six percentage points lower.

“Continued pension funded ratio deterioration is projected through the medium term and full actuarial funding of the required contributions is several years off,” Fitch said in a statement.

The rating agency added that a suspension of planned contributions for the 2014 and 2015 fiscal years, announced by Governor Chris Christie earlier this year, was likely to further erode pension funded ratios.

It concluded: “Fitch believes balancing the need for requisite pension system contributions with other long-term demands, such as infrastructure needs, property tax relief, and school funding, will continue to prove difficult.”

The three main credit rating agencies—Fitch, Moody’s, and Standard & Poor’s (S&P)—cut their ratings of New Jersey’s debt in April. The state was warned of a possible further downgrade by S&P in June, following news of Governor Christie’s plans to cut contributions to PERS from $3.8 billion to $1.4 billion.

The downgrade puts New Jersey one notch above Illinois on Fitch’s scale, with the mid-western state’s debt rated the lowest of any US state.

Illinois was also dealt a blow last week by Moody’s, which published a report warning the state that it faced “daunting” challenges relating to its pension funding. Although pension reforms could ease this pressure if passed by the Illinois Supreme Court, the amount of unfunded liabilities in the state’s pensions means bridging this gap will remain challenging “for many years”, the rating agency said.