New Jersey on Friday received its second credit downgrade under Gov. Phil Murphy, this time from S&P Global, which cited the financial hit the state has taken because of the COVID-19 recession, and the mass infusion of debt to make up for those losses.
“The downgrade reflects our view that New Jersey will continue to have a significant structural deficit that will be difficult to close in the coming years because of decreased revenues as a result of the COVID-19 pandemic, combined with high and increasing debt, pension, and other post-employment benefit liabilities,” David Hitchcock, a credit analyst with S&P, said in the Nov. 6 report.
The added $4.2 billion of new debt,- which Murphy and the legislature agreed to in September, was particularly worrying for a state still struggling to pay down other debt, like the unfunded public retirement system liabilities, Hitchcock said.
“Before the COVID pandemic, they had been making some progress on reducing their structural deficit. Now it suddenly ballooned up to what we see is a significant size and it will be a while before that could get carved down again,” Hitchcock continued.
New Jersey’s credit downgrade from S&P drags its rating from “A-” to “BBB+,” while a downgrade from Fitch in April meant they gave the state an A- rating, rather than an “A.”
Under Gov. Chris Christie – Murphy’s Republican predecessor – the state suffered a combined 11 credit downgrades across the three rating agencies, driven by the state’s unfunded pension liability. The third one is Moody’s, which at the time of this writing has yet to put out a report.
“It’s important to remember that the state’s high fixed costs are largely a result of legacy initiatives inherited after decades of mismanagement,” State Treasurer Elizabeth Maher Muoio said in a Friday afternoon statement. “This administration remains committed to ramping up pension payments to meet our full obligation.”
Fitch, in the April report, said the state was in particularly choppy waters because of the economic slowdown and loss of tax revenue, compounding its “structurally imbalanced financial operations, as reflected in the persistent underfunding of liabilities, slim reserves and an elevated long-term liability burden.”
Under the bonding plan, borrowing starts on Nov. 18 and includes over $1.9 billion out of a Federal Reserve program, which would be paid back over three years. The remaining $2.25 billion will be through the public market, and according to the Treasury will be paid back over a period of 12 years.
Murphy warned that the borrowing was necessary because 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.
Treasury officials initially planned to borrow over $4.5 billion, but the state fared much better in sales tax revenue, meaning it brought in an additional $398 million more than expected.
And the federal government had not yet come through on any more COVID-relief aid to individual states.
Fitch said on Friday that it would keep its rating of New Jersey at “A-,” confident that the state could handle this new financial stressor. Nonetheless, they gave New Jersey a negative outlook on Friday.
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.
Hitchcock said the lack of spending cuts meant the state further ran the risk of expenses without the money to pay for them.
This became a partisan sticking point in the days leading up to Sept. 29, when Murphy signed a $32.7 billion budget that would cover expenses through the end of June.
Republicans decried the budget 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.
“Our goal was to avoid the type of draconian cuts made during the Great Recession, which stymied our economic recovery and led to New Jersey being one of the last states to emerge from the recession,” Muoio maintained.