Amid COVID recovery, NJ gets first credit upgrade since 2005

New Jersey got its first credit rating upgrade since 2005, after one of the three main Wall Street rating agencies commended the Garden State on its ample cash on hand and efforts to cut its credit card debt.

Moody’s Investors Services, in the March 2 decision, moved New Jersey’s credit rating from A3 to A2, a step up from the “credit outlooks” that the state has seen in the past two years and slew of credit downgrades from over the past decade.

The decision gives a nod to “the state’s continuing trends of strong revenue and liquidity and its steps to more aggressively address liability burdens, including completion of a debt-reduction program and increased pension contributions.”

At $44 billion, New Jersey has one of the highest debt loads in the country. On top of that, the state’s public worker pensions are unfunded by about $100 billion, according to some estimates, and were the source of a combined 11 credit downgrades between 2010 and 2018, when former Gov. Chris Christie was in office.

Gov. Phil Murphy is slated to release his new budget address on March 8, after lawmakers granted a two-week extension to continue riding out the omicron variant and so that the address can be presented in person for the first time in two years.

“Our efforts to build New Jersey’s credit rating back up from decades of downgrades have yielded another positive result,” the governor said in a statement. “This proves that facing our challenges head on — rather than delaying and deferring – is the best way to get our house in order.”

With the Garden State flush with cash last spring and summer – thanks to stronger-than expected tax revenues, $4 billion in new debt, and billions more from federal pandemic-relief funds – Wall Street upgraded New Jersey’s financial outlooks, suggesting that calmer winds await the state.

But the unprecedented level of cash poses its own set of problems: those collections have allowed for massive spending increases, while New Jersey’s budget clocked in at a record-high $46.4 billion. State treasury officials warned that tax collections could begin to slow down this spring.

Wall Street analysts and critics of the state budget process cautioned that the state will need to come up with the funds to support those continued spending increases, lest their having to cut spending or raise taxes — something Murphy has promised to avoid in his second term.

States run the “risk of a fiscal cliff” given the limited time frame of the [American Rescue Plan] funds, said Doug Offerman, an analyst with Fitch, another rating agency.

“If states become used to … those funds being there, a few years from now when the funds are gone and they have to support services with their own revenues, it could create budget challenges,” he said in an interview last year. “That’s not just a New Jersey problem, that’s a risk for many states that are seeing these funds.”

Moody’s warned that should the state fail to address this “structural imbalance,” then it could be forced to downgrade the rating.

Other worrisome trends could include cuts in annual pension contributions, as well as an increase in unfunded pension obligations, or drops in the levels of available cash.

But, should the state be able to close the difference between cash on hand and its annual expenses — or keep the annual pension contributions going and have enough cash on hand — then the state’s financial outlook could improve, Moody’s said.

The agency’s expectation is that the state “will maintain recently improved governance practices,” and more so, continues “to benefit from a more proactive liability management and from the impact of both federal support and a better-than-expected revenue recovery after the pandemic-induced recession,” the analysis continues.

New Jersey’s current state budget marked the first time in 25 years that the state paid the full annual amount that’s actuarially recommended into its pension fund, a payment of $6.9 billion made last July

On top of that, the state recently moved to pay off $2.5 billion of its oldest and most expensive debt, and use another $1.2 billion to offset the accumulation of more debt to pay for various state expenses.

“Our improved credit rating will not only decrease the cost of annual borrowing for the state — saving taxpayers money now and in the future — but it also provides further evidence that we are taking the right steps on our continuing path toward fiscal security,” State Treasurer Elizabeth Maher Muoio said on Wednesday.