Despite Pension Overhaul, New Jersey Suffers Another Credit Rating Blow

(August 18, 2011) — Following Standard & Poor’s decision to downgrade US debt, Fitch Ratings has downgraded New Jersey’s bond rating a notch, citing the state’s failure to make full pension payments and its sluggish economic recovery despite proposed pension reforms.

New Jersey’s rating is now among the lowest in the nation, and could make it more costly for the state to borrow. Only California and Illinois have ratings lower than the AA-minus Fitch gave New Jersey.

The downgrade reflects the mounting budgetary pressure presented by growing funding needs for the state’s unfunded pension and employee benefit liabilities, amid a weak economic recovery, a high debt burden, limited financial flexibility, and persistent structural imbalance, Fitch explained. “Despite the recent passage of pension and health benefit reform legislation…continued pension funding level deterioration is projected,” the Fitch analysis said in a report, noting that this means the state will be required to pay more for pensions in the coming years.

The move by Fitch Ratings is the third time in less than six months that Wall Street has downgraded New Jersey’s bond rating. Before the state budget was finalized, both Moody’s and Standard & Poor’s gave New Jersey similar low ratings.

In March, a Moody’s Investors Services report predicted that New Jersey pension reform would deteriorate despite budget reform proposals by Gov. Chris Christie. The ratings agency said that the pension system faces a $30.7 billion unfunded liability for state workers. “New Jersey faces pension funding requirements that, like Illinois’, are straining the state’s budget,” the two-page report said. “In fiscal 2010, New Jersey failed to make any contribution, and it did not budget a contribution for the current year. In addition, the state faces retiree health benefit liabilities that are even more onerous than its pension burden. The governor has proposed additional reforms, including reversal of a 9% benefit increase granted in 2001, elimination of automatic cost-of-living adjustments, and increases in both the minimum retirement age and required employee contributions.”

The report said New Jersey is now “the seventh-lowest funded system in the country.”