New Jersey Faces Further Downgrade over Pensions

A credit rating agency has warned the governor’s actions on pension reform could hit its assessment of the Garden State—again.

(June 3, 2014) — Tinkering with New Jersey public pension system could result in another downgrade, ratings agency Standard & Poor’s (S&P) announced yesterday, barely two months since it last took action on the state’s ranking.

The rating agency took a dim view of Republican Governor Christie’s apparent about-face and decision not to fund the state’s public employees’ retirement system, which has a liability of around $47 billion.

“The governor’s decision to delay pension funding, while providing the necessary tools for cash management and budget control, has significant negative implications for the state’s liability profile,” S&P analysts said.

To balance the budget, which is significantly short of what is needed, Christie said he would cut two payments meant to shore up New Jersey’s public workers’ pension fund from a combined $3.8 billion to $1.38 billion.

“We believe the state’s decision to reverse course on its pension reform is the result of a revenue forecast that is not aligned with current economic conditions in the state, rapidly growing fixed costs, and limited flexibility with which to address any significant deviations from the forecast,” S&P analysts wrote, adding they had placed New Jersey on “CreditWatch with negative implications.”

In April, S&P, quickly followed by peers Moody’s and Fitch Ratings, downgraded the state to A+. This is the lowest rating given to any state and is shared by California and Illinois, which each have liability problems of their own.

A further downgrade would make New Jersey the lowest rated state in the US, which could have implications on its ability and costs to borrow.

“By using bullish assumptions about revenue growth and one-time measures to close budget gaps, the state defers making long-term structural changes to better align revenues and expenditures, pushing budgetary pressures to future years’ budgets and increasing its exposure to an eventual economic downturn,” the analysts wrote.

In January New Jersey State Senate President Stephen Sweeney told the Star-Ledger newspaper he was prepared to shut down state government if Governor Chris Christie did not support the payment into the public employee pension fund they had both promised when approving a major overhaul of the programme three years earlier.

Related content: SEC Hits Out at Underfunded Public Pensions & Redesigning US Public Pension Plans (in the Netherlands)

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