One of the three major Wall Street rating agencies warned about a potential future credit downgrade for New Jersey, as the COVID-19 outbreak decimates both state and local tax revenue—the first such move since Gov. Phil Murphy took office in January 2018.
Moody’s Investors Services on April 13 affirmed the state’s credit rating as A3, but revised its outlook from “stable” to “negative,” citing the global pandemic’s impacts on New Jersey’s finances and the economy, which are straining the state’s ability to structurally balance its budget, and elevating already-high liabilities.
Those “liabilities”– public worker retirement and health care plans unfunded by at least $100 billion – were the source of 11 credit downgrades during the eight-year tenure of former-Gov. Chris Christie, a Republican.
New Jersey has an A3 rating from Moody’s, an A rating from Fitch and an A negative rating from S&P Global.
Monday’s decision from Moody’s is not a credit downgrade, but rather a warning about the potential for one, something long-feared in the past two years by both the Murphy administration and legislative leadership, as well as left and right-leaning policy analysts.
Moody’s gave a nod to efforts of the past two years to infuse money into the state’s rainy day fund and to increase its surplus. Murphy’s 2021 budget initially called for the state to have $1.6 billion left over by the end of June, and $1.6 billion by June 30, 2021.
Still, that amounted to too little, too late, the report notes, and New Jersey “remains weak compared to peers with low fund balances and high fixed costs,” leading to “less flexibility to manage the current coronavirus-related economic disruption.”
“We knew the surplus we inherited was woefully inadequate to weather any serious economic downturn, which is why this administration has made building our reserves a core priority since taking office,” Jennifer Scriotino, a spokesperson for the state treasury, said in a statement.
“It’s encouraging that Moody’s acknowledged the notable improvement in our finances over the last two years, however, we know there is still much more work to be done,” she added.
Murphy said he plans to sign a law that would extend the state’s budget from June 30 to Sept. 30, so the Legislature and administration can gauge the extent of the outbreak’s impact on state revenue, and to buy time to win over billions of dollars in federal aid.
The state may ultimately have to borrow money to finance a three-month stopgap over the summer, according to Senate President Stephen Sweeney, D-3rd District, and the terms of that borrowing will largely come down to the state’s credit rating.
“The rating action also incorporates the mitigating impacts of substantial federal emergency assistance, which will stabilize near-term liquidity needs and bolster household income and spending and therefore tax revenue,” Moody’s said. “Federal assistance will also reimburse the state for coronavirus-related spending, increase Medicaid reimbursements and create significant direct lending from the Federal Reserve Bank.”
Moody’s decision is par for the course with New Jersey’s neighboring states of New York and Pennsylvania.
Like New Jersey, the credit rating and economic outlook for both New York and Pennsylvania depend on how much liquidity they have – that is, money which they’re free to plug elsewhere into their budgets – as well as the amount of federal aid received under the federal CARES Act and any future stimulus bills.
Across the Delaware River, S&P said it was closely watching how the same situation is playing out in Pennsylvania, which has an A-plus stable rating, though they have not yet revised the outlook.
“Already, the commonwealth’s general fund revenues underperformed expectations in March as reports began to reflect the economic effects of the pandemic—notably for only a portion of the month,” the report reads. “This deterioration is expected to be the tip of the iceberg as revenue shortfalls become more severe in the coming months.”
Moody’s said it revised New York’s Aa1 outlook from stable to negative, while Fitch revised New York’s AA-plus outlook from stable to negative as well.
Federal aid “will bolster household income and spending and therefore tax revenue, provide aid to hospitals, reimburse state and local governments for coronavirus-related spending and could potentially provide additional federal Medicaid reimbursement if certain obstacles for New York are overcome,” reads the April 1 report by Moody’s.