NJ Gets a Bond-Rating Upgrade But the Rating Is Still the Second-Lowest and the Path Ahead Remains Difficult

S&P Global upgraded New Jersey’s bond rating to A+, the latest of several upgrades from its nadir at BBB+ from 2020-22.  This is good news as far as it goes, but not nearly as good as Gov. Murphy proclaimed. S&P cited improvements in the overall debt load, mainly due to the reduction in the state’s unfunded pension liabilities from Murphy’s $40+ billion in pension funding. But New Jersey still has the second-worst bond ratings of any state, only ahead of Illinois.* The reality is that Murphy benefited from significant revenue windfalls, which allowed him to make marginal improvements in New Jersey’s balance sheet, but a look below the surface reveals that many challenges remain for the next governor.

Reflecting New Jersey’s low bond ratings, S&P had a few cautionary notes:

New Jersey’s overall debt, pension, and OPEB liabilities are likely to remain comparatively high for the foreseeable future … It also reflects our expectation the state will continue to work toward achieving structural budgetary balance longer term.

In other words, the path ahead is not easy:

• Structural budget deficits. New Jersey continues to have structural budget deficits.  Murphy has benefited from revenue windfalls and hiked New Jersey’s already-high taxes to new highs, but revenues still cannot keep up with his record spending. This year’s $58.8 billion budget represents an astounding 70% increase in spending during Murphy’s two terms, with a $1.5 billion structural deficit that was plugged by using funds set aside for other purposes.
• Depleted reserve funds. Murphy was able to use the revenue windfalls from federal COVID relief and the post-COVID surge in state tax revenues to reduce debt, but his debt defeasance fund has now run dry — after it was used to plug budget deficits (rather than pay down debt) for the past two years.  Similarly, New Jersey’s Rainy Day fund has also been raided to plug budget deficits and has dwindled from $10 billion to $6.7 billion, which is below average for the US.**  Again, this was during a period of revenue windfalls, which has ended.
• Pensions still underfunded. Then there is the state pension system. Again enabled by the revenue windfalls, Murphy has made five full pension payments, with this year’s at $7.2 billion, or 12% of the budget.  This has allowed for the use of favorable actuarial assumptions that have shrunk unfunded liabilities, but the pension system is still severely underfunded and New Jersey must continue to make full payments (approximately $7 billion per year) for another 20+ years before the pension system is fully funded.  Putting 12% of a record budget into pensions may prove difficult should a recession and/or market downturn occur. Should New Jersey not make a full payment, all those actuarial assumptions will cut in the other direction and unfunded liabilities would increase.  Despite Murphy’s $40+ billion, New Jersey’s pension system remains unreformed and in a precarious position.
• S&P can downgrade as well as upgrade. S&P makes very clear that if New Jersey deviates from its current path, ratings can be adjusted downward as easily as upward: “A departure from its recent commitment to improve its overall debt and liability profile could lead to downward rating pressure.”

As we have said many times, Murphy is a status quo governor. He was elected with the support of New Jersey’s powerful government unions — led by the NJEA — and he has largely governed for their benefit. His ever-increasing spending, ever-higher taxes, perennial budget deficits, depleted reserve funds, and unreformed, severely underfunded pension system are not sustainable. Murphy benefited from large revenue windfalls but didn’t do the hard work of addressing New Jersey’s many structural problems.  He’d rather cheerlead for cosmetic successes like a bond-rating upgrade to A+.

The cans have been kicked down the road for the next governor.

* New Jersey’s Moody’s and S&P ratings are A1/A+, respectively. Illinois is A3/A-. Pennsylvania and Kentucky are Aa2/A+.**$6.7 billion would cover 41 days of New Jersey’s budget year, which is below the US average of 49 days, according to Pew.