A Wall Street rating agency is warily eyeing how New Jersey might fare during the COVID-19 economic recession and be able to keep up with its massive pension costs, if at all.
That, in turn, caused S&P Global to drop the state’s credit outlook from A stable to A negative.
“There is a significant possibility New Jersey will reduce annual pension contributions or delay the scheduled contribution increases because of the current recession,” reads the S&P report.
Pension contributions in the fourth quarter of the current state budget, which runs through June 30, may be a “tempting target” for payment delays, S&P said.
In March, the Murphy administration froze $920 million of spending through June 30.
You always wondered, if you can’t pay your full pension contribution in the good times, what will happen in the bad times? Well now the bad times are here.
That comes after the state saw its first credit downgrade since 2017, a drop by Fitch from A to A minus on April 21, over concerns about the state’s ability to ride out an economic slowdown and loss of its tax revenue. Moody’s meanwhile dropped the state’s credit outlook of A3 from stable to negative.
The COVID-19 response triggered a domino effect in New Jersey and across the country. Governors put their states in virtual lockdown to prevent the spread of the virus—a tactic that is working, but could stay in place for many more weeks.
The mass business closures and bans on non-essential travel have ground commerce to a halt, destroying the types of revenue that states rely on – for New Jersey the sales, gas, income, corporate business, casino and lottery sales taxes.
S&P indicated it was worried about whether New Jersey could make its full pension and retirement health care benefits payments, because of sluggish tax revenues and how the state budget might fare come an Aug. 25 reintroduction and extended Sept. 30 deadline.
“You always wondered, if you can’t pay your full pension contribution in the good times, what will happen in the bad times? Well now the bad times are here,” said David Hitchcock, an analyst at S&P.
Unfunded by at least $100 billion, S&P on Wednesday described the state’s public worker retirement system as the “nation’s worst-funded pension system.” It was the source of 11 credit downgrades spanning Fitch, S&P and Moody’s during the eight years of Murphy’s Republican predecessor, former Gov. Chris Christie.
The congressional delegations for New York and New Jersey are seeking a combined $40 billion of federal aid for states, but that process has become muddled in politics on Capitol Hill and at the White House.
New Jersey, under Murphy, is likely to borrow roughly $5 billion from a new Federal Reserve program in order to shore up its finances, amid uncertainty over how much federal funding the state could get, but Hitchcock said that move was not particularly worrisome.
“That’s really more of a temporary thing,” he said. “I expect quite a few states to do that—New Jersey will not be the only one. What we’re more worried about is the structural deficit.”
The 2021 budget that Murphy presented in February clocks in at almost $41 billion, and called for $4.6 billion toward the state’s pension obligation. That’s still below the $6.1 billion the state should be paying every year – a milestone that would not be reached until the 2021 fiscal year, which starts July 1, 2022, under a plan adopted by Christie.
“New Jersey could face significant fiscal and economic pressures, stemming from the global COVID-19 pandemic and subsequent recession, due to its high pension … liabilities and low level of reserves going into the recession,” the S&P report states.
“We believe the structural deficit could start to grow again, perhaps substantially, as the result of the current recession, while New Jersey’s currently modest level of reserves and high fixed costs will not allow much space to make budget adjustments,” it adds.