Despite New Jersey taking on upward of $4.5 billion in new debt to cover the costs of its pandemic response and make up for cratering revenue, a major Wall Street rating agency said it was confident the state could handle the new financial stressor.
Fitch Ratings, in a Friday morning report, said it would keep the state’s crest rating at A-, as the Murphy administration goes to market with between $4.2 billion and $4.5 billion in bonds.
On the one hand, New Jersey “has less fiscal base to address a crisis [the COVID-19 pandemic and historic economic recession] of this magnitude,” said Douglass Offerman, an analyst with Fitch. But on the other, tax “revenues have done better than expected” and “the economy appears to be picking up,” he added.
“While there are many questions still about the pandemic and federal aid and about the strength of the recovery, we think that the situation essentially warranted leaving the rating,” he continued.
Fitch is one of the three primary rating agencies that gauge the risk public entities pose to potential lenders. The other two are Moody’s and S&P Global Ratings.
Gov. Phil Murphy approved a $32.7 billion spending plan for the state’s 2021 Fiscal Year on Sept. 29, after the 2020 budget was extended three months. It includes $4.5 billion of borrowing, which Murphy contended was sorely needed as the state saw billions of dollars in tax revenue evaporate because of the pandemic. Sales, corporate business and income taxes all dropped, as did transit fares and casino revenue.
All of this stemmed from widespread business shutdowns and travel restrictions, which Murphy said were essential to halt the spread of the virus.
Recently, he’s hinted that more restrictions are likely as a second wave surges across the state.
As the pandemic began to take hold of the state economy and everyday life in the spring, Murphy warned that the state could see itself in a “$10 billion hole,” and that the state would be short of up to $20 billion by June 2021 because of tax losses and pandemic-expenses.
But as the budget deadline neared, the state enacted a spending plan that Republicans decried as being packed with “pork” or “Christmas tree” spending, and which they argued did not reflect the dire scenario lawmakers laid out for the state’s finances.
Fitch said in its report that out of the $4.2 billion it looked at, more than $1.9 billion would come out of a Federal Reserve program meant to soften the financial blow for states that took a financial hit because of the pandemic. According to the State Treasury, that would be paid back over three years. The remaining $2.25 billion will be through the public market, and according to the Treasury be paid back over a period of 12 years.
Bonding is expected to move ahead sometime by the end of 2020, through a potential combination of the two. Interest rates for either option would fall between 2% and 6%.
State officials plan to put half of the funds – $2.3 billion – toward local school funding. New Jersey Transit will get $386 million, while $334.8 million will go toward higher education tuition aid grants, and hundreds of millions of dollars would go toward social support programs within the Department of Human Services.
Sheila Reynertson, a policy analyst at the progressive think tank New Jersey Policy Perspective, warned that New Jersey could face a “fiscal cliff” in the coming years, because a sluggish recovery could mean the state would not have the tax revenue to pay for services that are covered by the bond money.
“So we’re looking at a fiscal cliff in 2023, and that’s where we’re going to have to figure out what’s the priority. In 2022, is it to maintain everything as we have in 2021, or do we switch gears and try to prepare ourselves for 2023?” she said.
Fitch noted such a scenario in its Friday report, warning that if tax money falls short of what lawmakers and state officials are hoping for, then the state would need to enact “more substantial budget actions that could weaken the state’s operating performance.”
And if the state lacks “financial flexibility,” or if it cannot pay for billions of dollars in pension liabilities on top of these new bond expenses, then New Jersey could end up in financially choppy waters. “Will there be a significant structural budget gap next year when presumably they can’t deficit bond?” asked David Hitchcock, an analyst for S&P Global Ratings.l