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New Jersey Credit Rating Downgraded Ninth Time Under Gov. Christie

Moody's Downgrades Credit Rating Citing Increasingly Underfunded Pension System
Gov. Christie
Gov. Christie has frequently clashed with protestors at town halls over the pension Daniel Munoz

TRENTON, NJ—New Jersey's bond rating saw its ninth downgrade since Governor Christie took office in 2010.

The credit downgrade issued by Moody's Investor Service drops the state's rating from A1 to A2, making it more expensive for the state to borrow money, which it uses to fund expensive public projects like road repairs.

A credit rating is the evaluation of credit worthiness given to an issuer of debt, namely government entities and companies. Credit ratings are done by credit bureaus and consumer credit reporting agencies, and are intended to help investors decide how risky an investment could be.

The downgrade would apply to $2.2 billion in general obligation (GO) debt, and an additional $30 billion in appropriation-backed and GO-related debt.

There are fourteen local and statewide bond programs that could be affected by the downgrade.

The other main credit rating agencies are Standard & Poor's (S&P) and Fitch's. Along with Moody's, the three agencies have parallel rating structures and usually give entities similar ratings.

Moody's cited the pension underfunding and structural deficits as the reasons behind why the state received its downgrade.

"We expect liquidity and structural balance to remain very weak through fiscal [year] 2016," the Moody's report reads.

"Without meaningful structural changes to the state's budget, such as pension reform that dramatically improves pension affordability, the state's structural imbalance will continue to grow, and the state's rating will continue to fall."

The report elaborated that low fiscal contributions to the pension in 2017 could contribute to future credit downgrades of the state.

In May 2014, Moody's downgraded New Jersey from Aa3 to A1. Then, in September, S&P downgraded New Jersey's rating from A+ to A.

Governor Christie broke his promise to fully fund the pension system, attempting to slash $887 million in mandatory pension payments from the state budget in 2014, and another $1.57 billion in this year's state budget.

In February, Superior Court Judge Mary Jacobson ruled that Christie could go forward with the first cut in pensions, but had to pay the second amount. The Christie administration has appealed the decision.

New Jersey's public worker pension and health benefits system is the fourth-most underfunded in the country, $37 billion underfunded to be exact.

The pension system has been underfunded since the 1990's, with previous Governors making a habit of using the money from the required payments to plug holes in the state budget elsewhere.

These Governors include Democrats Jon Corzine, James McGreevey, James Florio and Richard Codey, and Republican Christie Whitman.

Speaking about the state's teacher's unions at a recent town hall meeting in Hasbrouck Heights, Governor Christie asked a resident, "Where were they when Jim McGreevey was not paying into the pension and Dick Codey was not paying into the pension?"

"They were in court," responded Steve Panagiotou, the husband of a Teaneck teacher who had been called on to ask a question of the Governor.

"No they weren't, they didn't even sue them back then," the Governor said in response.

The NJ Education Association (NJEA), the largest teacher's union in the state, soon released a response accusing Christie of lying, since the union did in fact sue the McGreevey administration over deferred pension payments.

“Both statements are lies,” said NJEA President Wendell Steinhauer. “NJEA did sue the state over its pension funding failures in 2003, while McGreevey was governor. That case dragged on for several years, through the Codey and Corzine administrations, and was only finally settled in 2010, during Christie’s first months in office.”

“In addition, NJEA members have never missed a single pension payment, much less two years’ worth, as Christie’s alleged,” Steinhauer added.

The NJEA and the New Jersey State Policeman's Benevolent Association are the two most well-known unions adamantly fighting against Christie's continued underfunding of the pension system, but more than a dozen others joined together in the recent lawsuit to force the administration to increase its payments.

A commission put together by Governor Christie released a report in February on how to approach the growing pension liabilities. The panel found that New Jersey was facing nearly $90 billion in underfunded public worker pensions and health benefits.

By 2016, the state's contributions to the pension system will have increased to $4.3 billion, while contributions to the health benefits system will have increased to $3.7 billion.

The commission recommended that the current pension plan be frozen, and instead move public employees to a hybrid "cash-balance plan" consisting of a traditional defined-benefit pension plan and a 401(k) defined-contribution plan.

Healthcare coverage would be reduced, with the employee paying a larger share of the insurance costs, at least 25%, though it could be higher depending on the income of the employee.

Local school districts would take over responsibility for local pension and benefits for school employees. The system is currently run by the state.

The committee estimates the pension freeze would save state and local goverrnments around $2 billion in the first year alone. Public employees under the new pension plan would be unable to acquire new benefits, though their existing benefits would be protected.

"If adopted, it would stabilie the public employee pension system for at least 35 years," the report reads.

"We recognize that there are elements of this approach that are likely to be unpopular at first, but believe in time they will be viewed as the best way to move forward," reads the commission's report.

The commission argues that, under this plan, state payments to the pension could be cut from $8.05 billion to $4.59 billion starting in 2016. Further, $1.72 billion would be contributed to the healthcare system, $2.6 billion to the frozen pension plans, and $266 million to retirement plans.

More extreme alternatives to balance the budget and fund pensions could also include increasing the sales tax from 7% to 10%, or increasing the income tax to 29%.

Christie touted the bipartisan commission's proposals as a victory for the state pension, stating in his budget address that he had "reached an unprecedented accord with the NJEA."

This announcement took the NJEA by surprise, and the union immediately went on the record saying the Governor "overstated their partnership."

The Governor would later deny that he had actually said this, instead telling the press, "We agreed to a road map."