Credit: (AP Photo/Peter Morgan)A new round of Wall Street evaluations of New Jersey’s creditworthiness highlights some of the fiscal progress the state has made in recent years, but also areas of lingering concern.
Among the key accomplishments listed in recent weeks by top rating firms are the state’s maintenance of robust budget reserves and continued full public-worker pension contributions.
These have been top priorities for Gov. Phil Murphy since taking office in early 2018, but it remains to be seen whether gains made in these areas in recent years can withstand the next economic downturn.
The reports written for investors who may be considering the purchase of a state bond also provide an unvarnished look at a state’s remaining fiscal challenges, such as New Jersey’s reliance on nonrecurring or one-shot sources of revenue to balance the current fiscal year budget.
And while New Jersey hasn’t scored any credit-rating upgrades so far this year, one of the financial firms, Moody’s Ratings, did move the state’s credit outlook from “stable” to “positive” earlier this month in advance of an upcoming state bond issue.
Trending in the right direction
That outlook change could serve as a signal to investors that New Jersey is trending in the right direction.
“We remain laser focused in our multi-year efforts to restore the state’s fiscal standing,” Murphy said in response to the Moody’s outlook adjustment.
The latest annual budget enacted by Murphy and fellow Democrats who control the Legislature continued the practice of funding full actuarially determined pension contributions for the fourth year in a row.
While technical in nature, a state’s credit rating can be a key factor in determining how easy it is for it to borrow money to fund long-term investments in things like schools and transportation infrastructure that cannot be paid for in a single budget.
A strong bond rating can also lead to lower borrowing costs, costs ultimately funded in the state budget, which can ease pressure on taxpayers or free up funds for other priorities.
New Jersey had $41.5 billion in bonded debt as of the 2023 fiscal year, and taxpayer-funded debt service, excluding school-construction aid, costs the state more than $3 billion annually.
During the first year of the COVID-19 pandemic, two different Wall Street firms lowered New Jersey’s bond rating as the state suffered severe job losses and the annual budget was upset by swiftly declining tax revenues.
That left New Jersey with one of the lowest bond ratings of any U.S. state, just as the Murphy administration was preparing to issue roughly $4 billion in new debt to help sustain the state budget during the worst phase of the health crisis.
Recent improvements
However, in more recent years, New Jersey has enjoyed a series of bond-rating upgrades from the four firms that routinely evaluate the creditworthiness of states. The upgrades have come amid a strong economic recovery from the pandemic, and as the Murphy administration has prioritized things like funding pension obligations, paying down debt and building up budget reserves.
Among those upgrades was a one-notch improvement from S&P Global in 2023 that left New Jersey with an A rating which, while a still few rungs below the firm’s AAA gold standard, signals to investors a “strong capacity to meet financial commitments.”
In their explanation of last year’s upgrade, S&P Global’s analysts cited New Jersey’s recent practice of funding full actuarially determined public-worker pension contributions among the persuasive factors.
This year’s budget enacted by Murphy and fellow Democrats who control the Legislature continued the practice of fully funding pension contributions for the fourth year in a row. That follows more than two decades of governors and lawmakers from both parties agreeing to short annual pension contributions or, in some years, make no payments at all.
A balancing act
Meanwhile, Murphy and lawmakers also approved in late June nearly $400 million in “off-budget” spending on capital investments, the cost of which will be covered by the state’s dedicated debt-relief reserve, obviating the need for additional long-term debt to underwrite the capital projects.
The latest state budget also set aside more than $6 billion in surplus. That’s a large sum by historical standards, equaling more than 10% of the overall nearly $57 billion spending plan.
Analysts at Fitch Ratings earlier this month listed several factors that could lead to a rating downgrade. Among them were ‘significant weakening of the state’s economic trajectory that leads to revenue growth consistently below long-term expectations for national inflation.’
The budget reserve is a key resource state government can deploy to maintain resiliency amid unanticipated revenue losses, such as those triggered during recessions and other economic downturns.
But even as the budget bolstered the state pension system and maintained robust reserves, Murphy and lawmakers chose to spend more than the state is projected to collect from taxes and other revenue sources during the 2025 fiscal year, which ends June 30.
That left a structural imbalance or gap of more than $2 billion that is being bridged, in part, by lowering the surplus from $8.25 billion to $6.125 billion during the 2025 fiscal year, according to the latest budget documents.
A key Wall Street metric
Maintaining reserves equal to “at least 10% of appropriations beyond the current fiscal year” was listed by analysts from Moody’s among factors that could lead to another bond-rating upgrade in their recent report on New Jersey finances.
Also listed as another key factor is the “demonstration of structural balance,” according to the latest Moody’s report.
In a separate report, analysts at Kroll Bond Rating Agency listed a number of credit “positives” and “challenges” for New Jersey.
Included in the positive category was the New Jersey governor’s “broad executive powers under the New Jersey Constitution to adjust the budget and reduce spending to maintain budget balance.”
However, while “one-time federal revenues bolstered finances through the pandemic,” the Kroll analysts listed the fact that “reserves are now being drawn down” as a remaining challenge.
Meanwhile, analysts at Fitch Ratings earlier this month listed several factors that could lead to a rating downgrade. Among them were “significant weakening of the state’s economic trajectory that leads to revenue growth consistently below long-term expectations for national inflation.”
“Persistent reliance on non-structural budget solutions or lowering ending balances to levels consistently below 10% of revenues” could also lead to a downgrade, the Fitch analysts said.
