Fitch, Moody’s Call Out NJ for Plugging Deficit with Pension Funds

Following 11th-hour actuarial tinkering, all three major ratings agencies have a negative view on New Jersey's credit.

(March 31, 2015) – Fitch Ratings and Moody’s have warned investors about New Jersey’s credit quality following a funding cut to the state’s $70 billion pension system that helps close a $694 million budget shortfall.

The state has canceled $94 million in budgeted contributions for the 2014 fiscal year, and cut roughly $150 million from next year’s expected payment.

“As a result of recurring budget gaps and increasingly limited options, the state continues to use one-time fixes that indicate above-average financial weakness,” wrote Baye Larsen, a senior analyst at Moody’s, in the ratings agency’s latest credit outlook note. 

The state is required by law to pay at least 3/7th (42.8%) of its 2014 pension obligations as calculated by the fund’s actuaries. However, the retirement system changed its funding formula mid-way through the year to lower the state’s required payout for 2014 and beyond.

A landmark benefits reform package, signed into law by Governor Chris Christie in 2011, included significant hikes in employee pension contributions. Christie sold the controversial bill as a way “to bring solvency and long-term stability” to New Jersey’s then-66% funded pension system.

But late last month, new actuarial reports revealed that the state had begun discounting employees’ additional contributions from its own obligations. The technique, while common among public pensions, cancels out some of the reform’s promised benefit to funding levels, which now hover near 61%

The change trimmed $25 million off of the minimum payment required by law to New Jersey’s largest pension, the $27 billion Public Employee Retirement System (PERS). Combined with 2010 reforms allowing a seven-year ramp up to full actuarial contributions, lawmakers have negotiated a $1 billion PERS bill down to $426 million for the year.

Fitch took note of these maneuvers in its downgraded outlook for New Jersey debt.

“The state's ongoing reliance on one-time budget solutions to achieve and maintain balance and its insufficient annual pension contributions are evidence of a significant structural imbalance,” the agency argued.

Still, Fitch felt the New Jersey benefited from “the governor's strong executive powers to implement any necessary expenditure reductions to balance the budget, and the state's consistent history of doing so.”

Treasury Spokesperson Joseph Perone defended the actuarial change to aiCIO, pointing out its legality several times.

“The change in methodology has a minor effect on the funded ratio over decades and we feel that the savings in payment for the state and locals is justified,” Perone said in a statement. “Let the total pension payment not be understated—this year’s pension contribution is the largest in New Jersey history. This administration has made pension payment totaling $5.3 billion: more than twice the $2.4 billion put in by all governors combined in the prior 10 years.”

The state investment council’s Chairman Bob Grady did not respond to requests for comment.  

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