By David Cruz
Correspondent
Whether he has a year or considerably less time left in his term, Gov. Chris Christie’s legacy will be colored by 10 credit downgrades, the latest of which came this week from Standard & Poors, which downgraded the state’s general obligation bonds from A to A-, continuing its negative outlook for the state.
“The primary consideration right now is the very high pension liabilities,” explained David Hitchcock, U.S. state analyst for S&P Global Ratings. “They’re 17 percent of state income, over $10,000 per capita just for the unfunded pension liability. They’re very high.”
Translation: the pension system is underfunded. The state has only about a third of what it needs to meet its pension obligations.
But that’s just for starters. That Transportation Trust Fund deal last year also impacts the budget going forward.
The deal cut the sales tax and eliminated the estate tax. That’s going to cost the budget up to $1 billion by 2021.
The gas tax increase will generate $1 billion by 2021. But voters elected to put that money in a lock box for transportation and infrastructure projects only.
On top of that, continued slow growth means even less tax revenue for the state.
So, what’s the net effect of all this? Assemblyman Gary Schaer chairs the budget committee.
“It means more money going to pay interest that would otherwise go to needed and agreed upon social programs and other programs of the state,” he said. “It will be more expensive for the state to borrow. The state is now rated A- by S&P. For some of our bonds, in terms of moral obligation bonds, we’re at BBB-, which is painfully close to going into junk status, which would be catastrophic to the state’s long-term growth.”
It’s like you went to borrow money for a new car or new home. The lender checks your credit score. Think of the bond ratings as your credit score. If you have a score of, say 650, lenders are going to charge you a higher interest and/or offer less favorable terms than they would the guy across the street who has an 850 credit score.
“We rate bonds, so this is for the repayment of the general obligation bonds,” said Hitchcock. “We do an assessment as to the likelihood of repayment of those bonds.”
So if New Jersey wanted to buy a new car, this would not be a good time to try for a loan. But it can only get better, right?
“I think realistically any change in fiscal policy in the next year during the remaining few months of Gov. Christie’s term is unrealistic,” said Schaer. “I think he’s proved after seven years that meaningful change is not going to occur.”
Schaer says only a change of administration will bring a reversal of fortune. S&P doesn’t make recommendations on policy but the agency is a little less down on the state, long term.
“The state has a lot of pluses, too,” said Hitchcock. “They have high incomes; it’s a diverse economy. There is growth, which I can’t say for all states.”
With a growth rate of just 1 percent — as opposed to the governor’s projected 3.6 percent — the state is going to need a real adrenaline shot to perk up its economy and to convince ratings agencies that it’s getting the message.