The Fitch ratings agency announced on Wednesday that it has downgraded New Jersey’s bond rating to AA- from AA. A press release from the ratings agency placed the blame for the downgrade squarely on the state’s massive unfunded pension liabilities – estimated at about $55 billion.
The release notes recent efforts by the governor and legislature to reduce those liabilities, but maintains, “meeting the requisite increases in pension contributions will be challenging and is likely to conflict with other long term challenges, such as property tax relief, school funding, and infrastructure needs.”
These are the main points listed as “key ratings drivers” in Fitch’s statement:
- The downgrade of the state’s GO rating to ‘AA-’ from ‘AA’ reflects the mounting budgetary pressure presented by significant and growing funding needs for the state’s unfunded pension and employee benefit liabilities, particularly in the context of a weak economic recovery, a high debt burden, limited financial flexibility, and persistent structural imbalance.
- Despite recent, significant action to contain future growth in the state’s accumulated pension liability, continued funding level deterioration is projected through the medium term as full funding of the actuarially required contributions is phased in, resulting in sizeable increases in annually required contributions. Fitch believes that meeting the requisite increases in pension contributions will be challenging and is likely to conflict with other long term challenges, such as property tax relief, school funding, and infrastructure needs.
- Management has proactively responded to past revenue weakness, and growth in state spending has been contained. Nevertheless, the state’s budget remains structurally imbalanced inclusive of unfunded pension contributions. Reserve balances are expected to remain narrow, offering limited flexibility to absorb unforeseen needs.
- New Jersey benefits from a wealthy populace and a broad and diverse economy. The state’s recent economic performance has been weak and the state is expected to lag the nation in recovering from the recent recession.
- New Jersey’s debt position remains high, and the state’s long term pension and employee benefits obligations are very significant.