Fitch holds NJ’s rating at A- with negative outlook

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New Jersey is buoyed by billions of dollars in extra cash and defying expectations of an economic meltdown from the pandemic. But with a monumentally larger credit card bill, massive pension liability and unfunded expenses on the horizon, the state is showing signs of dire financial straits in the near future.

Citing that, Wall Street rating agency Fitch Ratings said it would not change New Jersey’s credit rating from A-, nor would it be changing the outlook from negative.

“The weaker position is the legacy of decades of structural budget mismatches and escalating liabilities that had only partly been addressed by the time the coronavirus pandemic unfolded with the state as an initial epicenter,” Fitch analysts said on April 13. “Better-than-expected revenue performance has offset some of Fitch’s initial credit concerns, but risks remain, even with significant one-time federal aid coming from the March 2021 American Rescue Plan Act.”

High debt and “the accumulated effects of weak pension contribution” continue to be major drags on the state’s economy, Fitch continued.

Last Friday, another Wall street agency, Moody’s Investors Services, upgraded the state’s economic outlook from A3 and from negative to stable, citing the billions of dollars in extra cash. It cited the same reasons as Fitch: Much better revenue than expected, more debt and widening gaps between expenses and the funds to pay for them.

“However, large fund balances, plans to accelerate pension contributions and fund pay-go capital projects, and the recent demonstration of the governor’s broad powers to reduce expenditures mid-year reflect overall increased budget flexibility compared to the beginning of the coronavirus pandemic,” the analysis adds.

Top budget lawmakers are pressing for the state to adopt longer-term financial planning to account for those drop-offs in state dollars as the bond money and federal aid dries up, something supported by Gov. Phil Murphy. His spending plan for the 2022 fiscal year, which runs from July 1 to June 30, 2022, clocks in at a record-high $44.8 billion.

The Moody’s decision came almost a year after it warned that the state could suffer devastating economic blows because of the pandemic.

Murphy cautioned that the state could see upward of tens of billions of dollars in tax revenue evaporate thanks to large-scale business closures that halted the flow of tax revenue to the state.

In order to make up for that potential loss, the state relied on $7.9 billion in direct or indirect federal relief, and roughly $4 billion in debt. Fitch and S&P Global cited the debt when issuing the state’s first downgrades under Murphy’s term.

But over the past two months, the exact opposite of a financial squeeze has occurred, and the state is expected to bring $3 billion more by June 30 than what the state’s financial analysts predicted last fall.

And, Murphy added, the state is expected to sock away roughly $6.3 billion into its surplus over the next year.

The non-partisan Office of Legislative Services, in fact, projected that by the end of the next budget year – meaning June 30, 2022 – the state will end up with $550 million more than what Treasury officials are expecting.

Now lawmakers are questioning whether the state needed the $4 billion of debt in the first place, but Murphy defended the borrowing, saying on April 7 that “we make the decisions at the time we make them based on the best information we have.”