Christie's pension plan could trigger another downgrade, S&P warns

By Salvador Rizzo/The Star-Ledger
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on June 02, 2014

Governor Chris Christie during a press conference in his outer office on the state 2014-2015 fiscal budget. Trenton, NJ 5/20/14


TRENTON — Gov. Chris Christie's plan to cut funding for public-worker pensions means New Jersey's debt could be downgraded again sometime in the next three months, a Wall Street credit-rating agency said today in a note to investors.

Standard & Poor's warned that New Jersey's credit rating could take another hit in the next 60 to 90 days depending on the budget plan that Christie and the Democratic-controlled Legislature end up passing for the the new fiscal year, which begins July 1.

The Garden State has been beset by slow economic growth and a slew of rising costs in the wake of the Great Recession, a problem that grew worse this year after disappointing tax collections for the key month of April.

Standard & Poor's cut New Jersey's credit rating by one notch in April, to A+, one of the lowest ratings in the country. That was before Christie's administration announced a big miss in its revenue forecast for the current and incoming fiscal years. The two-year budget gap is now estimated at $2.7 billion.

To balance the budget, Christie said he intends to cut two payments meant to shore up the financial health of New Jersey's strapped pension fund for public workers — from a combined $3.8 billion to $1.38 billion.

The plan is an about-face for the Republican governor, who had signed laws in 2010 and 2011 promising higher payments each year to fix the pension mess once and for all. Christie said last month that he couldn't keep that commitment in the face of mounting budget pressure.

"We believe the state's decision to reverse course on its pension reform is the result of a revenue forecast that is not aligned with current economic conditions in the state, rapidly growing fixed costs, and limited flexibility with which to address any significant deviations from the forecast," S&P analysts wrote today, placing New Jersey on "CreditWatch with negative implications."

"In our view, the governor's decision to delay pension funding, while providing the necessary tools for cash management and budget control, has significant negative implications for the state's liability profile."

The state's pension liability was $47 billion as of the latest report, Standard & Poor's said. The agency also said New Jersey is neglecting to address long-term, "structural" issues with its budget aside from the pension problem.

"By using bullish assumptions about revenue growth and one-time measures to close budget gaps, the state defers making long-term structural changes to better align revenues and expenditures, pushing budgetary pressures to future years' budgets and increasing its exposure to an eventual economic downturn," the analysts wrote.

Christie is asking Democrats in the state Legislature to approve part of his pension plan. Democratic leaders including Senate President Stephen Sweeney and Assembly Speaker Vincent Prieto have criticized the governor's plan, and Sweeney has threatened to shut down the state government if Christie fails to make the pension payments he had pledged.

Democrats are calling for an increase on the income tax paid by the state's millionaires as a way to bring in more tax money. Christie has vowed to veto the millionaires tax, which he has done three times already. S&P said "the lack of consensus on addressing the fiscal 2015 budget gap could be a source of credit pressure in the near term."

Two of the largest state public-worker unions, the New Jersey Education Association and the Communications Workers of America, have said they plan to sue in state court to try to block Christie's move.

Any lawsuits, government shutdowns, or other developments in the budget arena could all affect the state's credit rating, S&P said. It noted, however, that the state still benefits from a "diverse economic base" and "high wealth and incomes."

A spokesman for the state Treasury Department, Joseph Perone, said the warning from S&P "reinforces the governor’s continued call for the Legislature to join him in enacting meaningful pension and health benefit reforms." Christie has been working on a new plan to tackle the pension system's woes over the long term, but has not released any details yet.

Perone added that if Christie did not cut the pension payments, hospitals and schools could have taken the hit instead.

"To be clear, the governor acted to bring the budget into balance, while continuing to pay the active employee pension costs that are accruing on our watch and protecting investments like schools, hospitals, and our colleges and universities."

Each time New Jersey is downgraded, investors are more likely to increase the state’s borrowing costs for major projects such as school construction or bridge repairs. Only California and Illinois have lower ratings from the major Wall Street rating houses.

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