With its significant bonded debt and unfunded public-worker pension commitments, New Jersey has again landed near the bottom among the U.S. states in rankings released by a leading Wall Street credit-rating agency.

The latest state-by-state liability analysis published by Fitch Ratings puts New Jersey 47th out of the 50 states in a key scoring of each state’s total long-term liabilities measured against the respective total personal income of its residents.

Despite the overall poor showing, the same analysis does point to some recent improvements New Jersey has made in this area, with one section of the report noting Gov. Phil Murphy and state lawmakers have, in recent years, begun to prioritize debt relief and full pension funding.

And while the state still sits near the very bottom in the rankings, New Jersey has enjoyed a nearly eight percentage-point improvement in Fitch’s long-term liability-to-personal income metric between the 2016 and 2023 fiscal years, according to the analysis.

“While there is still work to be done, we are moving in the right direction,” said state Treasurer Elizabeth Maher Muoio in response to the Fitch analysis.

Whether New Jersey can keep up the momentum over the long term and eventually move up the rankings remains a big open question heading into Murphy’s final full year in office.

Challenges ahead

A multiyear budget analysis released earlier this year by a bipartisan fiscal policy working group affiliated with Rowan University suggests more challenging times are likely looming for the state’s fiscal policymakers.

The group predicted structural gaps baked into the last few state budgets will persist through at least the middle of 2028 under New Jersey’s current tax and spending policies, which means lawmakers could be tempted to deplete surplus or reduce pension payments to help narrow the gaps.

According to the analysis released last week by Fitch Ratings, the median ratio of direct bonded debt and long-term net pension liabilities for the 50 states during the 2023 fiscal year was 4.2% of total personal income.

In New Jersey, governors and lawmakers from both parties for more than two decades shorted annual employer pension contributions and, in some years, made no contribution at all.

That’s up slightly from the 3.9% median for states that was measured during the 2022 fiscal year, according to Fitch, which used the states’ respective financial audits as a basis for the evaluation.

Leading the way among the 50 states during the 2023 fiscal year was Tennessee, with a liability burden that was measured at just 1% of personal income during the 2023 calendar year. Also ranking in the top five were Nebraska, 1.1%; South Dakota, 1.2%; Florida, 1.4%; and Arizona, 1.7%.

At the other end of the state-by-state rankings were Connecticut, 23%; Illinois, 22.8%; Hawaii, 19.4%; New Jersey, 17%; and Kentucky, 15.9%.

Key pension payments

While each state has its individual circumstances, Fitch Ratings’ senior director Doug Offerman said the states that are consistently making at least the full annual employer pension contribution as calculated by actuaries tend to be the ones scoring high in the annual rankings.

“In general, the states that have done the best at funding, over time, have been persistently providing annual contributions to pensions, sufficient to make steady progress in lowering liabilities,” Offerman said during a recent interview with NJ Spotlight News.

“We’re talking over a decades-long timeframe,” he said.

But in New Jersey, governors and lawmakers from both parties for more than two decades did the opposite by shorting annual employer pension contributions and, in some years, making no contribution at all.

That built up a huge unfunded pension liability and actuaries have estimated it will take decades to undo all the damage. It’s also resulted in the freezing of cost-of-living adjustments, or COLAs, for retirees that has lasted for more than a decade, including during a period of significant inflation.

Change of approach under Murphy

In more recent years, Murphy and fellow Democrats who control the state Legislature ended the practice of shorting pension contributions and made pension funding a top fiscal priority. Now, the size of the state’s annual pension contribution tops $7 billion, counting dedicated revenues from the New Jersey Lottery.

“The state having gotten to that is a big deal,” Offerman said of New Jersey’s recent record of budgeting full employer pension contributions.

‘New Jersey has made great strides towards righting our fiscal ship…’ —  NJ Treasurer Elizabeth Maher Muoio

However, whether New Jersey can join the ranks of states that keep to full pension funding over the long haul remains to be seen.

Many states, including New Jersey, enjoyed healthy tax-collection growth coming out of the worst years of the COVID-19 pandemic, and that helped generate the revenue needed to do things like pay down bonded debt and fund robust pension contributions.

But in more recent years, the pace of tax collections has slowed down. And while New Jersey is still projecting modest growth in the current fiscal year, Murphy and lawmakers have budgeted a wide, more than $2 billion gap between projected annual revenues and expenditures.

Raiding, diverting

To help sustain record-high annual spending of nearly $57 billion, Murphy and lawmakers agreed to raid the budget surplus and divert funding from the state’s dedicated debt-relief reserve.

Revenue from a new tax on top-earning corporations that will eventually go to cash-strapped New Jersey Transit is also being funneled into the state budget’s general fund during the 2025 fiscal year, which ends June 30.

During a recent panel discussion before a conference of local government leaders in Atlantic City, Senate Budget and Appropriations Committee Chair Paul Sarlo (D-Bergen) acknowledged the upcoming year could be “interesting” when it comes to budgeting.

“I think it’s going to be a little bit tighter than most people want it to be,” Sarlo said.

To that end, Murphy, a former Wall Street executive himself, will likely want to preserve a legacy on fiscal issues that includes the improved pension funding and building up of budget reserves, as well as securing a series of credit-rating upgrades, including from Fitch.

Muoio, who’s served as treasurer throughout Murphy’s two terms in office, pointed to the credit-rating upgrades in her response to New Jersey’s latest long-term liability ranking.

“New Jersey has made great strides towards righting our fiscal ship, including actions such as making full pension payments and defeasing bond obligations, leading to reductions in the State’s overall debt levels,” she said.

— Graphic by Genesis Obando