New Jersey suffered its first credit downgrade under Gov. Phil Murphy – from Wall Street rating agency Fitch – which dropped the state’s rating from A to A minus, arguing that the state could be ill-equipped to handle a COVID-19-fueled recession.
Fitch said the state was in particular trouble ahead of the ensuing economic slowdown and loss of tax revenue because of its “structurally imbalanced financial operations, as reflected in the persistent underfunding of liabilities, slim reserves and an elevated long-term liability burden.”
The agency also revised the state’s outlook to negative, indicating that it could see another credit downgrade within the next two years.
“Fitch expects the direction of the state’s credit quality to become clearer only after the immediate health crisis subsides and as the outlines of the recession and the effectiveness of the state’s fiscal responses come into view,” the report reads.
Murphy has ordered tens of thousands of businesses to shutter their windows, as well as a ban on public gatherings and non-essential travel.
The move has decimated billions of dollars in tax revenues, and Murphy’s $40.9 billion budget introduced in February has all been thrown out the window – the budget deadline was pushed from June 30 to Sept. 30, and Murphy has until Aug. 25 to present a new address.
Moody’s last week warned that the state could suffer a downgrade, warning of economically choppy waters because of how highly dependent on increasingly uncertain federal aid – or billions of dollars in borrowing should that plan not pan out.
The state does at least have a “diverse, high wealthy economy” going for it, an improved “financial management” and “strong control over revenues and spending inherent in a state’s powers.”
Murphy’s predecessor – Republican Gov. Chris Christie – saw 11 downgrades during his eight years in office, spanning Fitch, S&P Global and Moody’s Investors Services. All three cited the state’s public worker retirement and health care plans, which were unfunded by at least $100 billion.
“I’m not shocked,” Murphy said at a Tuesday afternoon press briefing in Trenton. “This is no time to get political, but boy… we entered this crisis with a fiscal pea-shooter, given the decades of fiscal mismanagement of this state in one form or another.”
The Democratic governor has frequently made his way into Manhattan to meet with the three agencies, and prior to today has been successful in staving off a cut to the state’s credit
At press time, the governor was not immediately able to comment.
The Murphy administration has made several attempts to inject money into the state’s rainy day funds, considered one of the worst-financed pots of money in the country. But Moody’s and Fitch have both argued that the moves were too little too late.
“The lack of meaningful reserves necessitates a search for outside liquidity support and the scale of the estimated budgetary impact is significant, absent additional federal assistance,” reads the Fitch report.
To plug holes elsewhere in the budget, the Murphy administration is looking to borrow up to $9 billion from the Federal Reserve to plug holes in its budget, as uncertainty grows over whether the state could get enough of a bailout from Congress and the Trump administration.
Those bonds would be backed by the state’s property and sales tax – the latter of which could be raised – according to draft legislation.
Murphy added on Tuesday that while the credit downgrade would not hamper the state’s ability to buy those bonds, they could nonetheless be made to paid “a modest amount more” in higher interest rates
Both New Jersey and New York’s Congressional delegations are seeking a combined $40 billion for the two states to shore up their finances.
“While state action to address the downturn is likely to increase the state’s liability burden, Fitch believes the increase will be modest, with a more pronounced impact on expenditure flexibility,” the analysis continues.
The proposal has seen a cold response from Senate President Stephen Sweeney, D-3rd District, who was nonetheless open to the proposal once the state could gauge the true financial impact of the global pandemic.
Assembly Speaker Craig Coughlin, D-19th, on the other hand was more open to “responsible” borrowing, but said “funds must be specifically dedicated to assisting our residents, businesses, municipalities and schools.”
Murphy has warned that if both plans fall through, then “folks should assume we’re going to have to gut programs.”
Already, Senate President Stephen Sweeney, D-3rd District, proposed partially furloughing up to 100,000 state and local public employees, which could save the state $750 million over three months.
“I promise that we will continue to take care of our public sector employees,” Sweeney said on Twitter. “They will retain the benefits that they have enjoyed and will come back to their positions after this.”
Editor’s Note: This article was updated on April 21, 2020 at 4:22 p.m. EST to include comments from Gov. Phil Murphy.