Fitch Ratings affirmed New Jersey’s “A” bond rating Thursday instead of issuing a downgrade as it and other analysts have done in the past.
But Fitch analysts warned that pension costs are rising rapidly while lawmakers and Governor Christie are unable to find common ground on New Jersey’s biggest financial problems.
New Jersey’s A rating is one of the lowest in the country. Fitch, Moody’s Investors Service and Standard & Poor’s have downgraded the state’s bonds nine times since Christie, a Republican, took office in 2010.
Fitch analysts said that the state’s economic performance revved up in 2015 and that Christie’s most recent budget plans have relied on more realistic revenue forecasts than before.
Still, the A rating “incorporates sizable spending pressures, structural budget imbalance evidenced by persistent underfunding of liabilities, and the absence of consensus on short and long-term solutions to shift the state toward more sustainable finances,” Fitch analysts wrote in a note to investors Thursday.
Fitch is the first major credit-rating agency on Wall Street to weigh in on Christie’s new, $34.8 billion budget proposal for the fiscal year that begins July 1. The Democratic-controlled Legislature has scheduled several months of hearings on the budget plan.
“The governor’s proposed budget for fiscal 2017 is premised on 3.1 percent growth in expected revenue from fiscal 2016,” Fitch said, calling the forecast “reasonable.”
Over the long term, however, New Jersey still faces critical and fundamental problems such as a high debt load and soaring unfunded liabilities for pension and health-care benefits for public workers who retire.
“New Jersey benefits from high wealth and a broad economy; these positives are offset, however, by a high debt burden and sizable unfunded retiree liabilities,” Fitch said.
The pension system faces $40 billion in unfunded liabilities under the terms of state law, and $80 billion under more rigorous federal accounting standards. Meanwhile, the funding gap for health benefits for retirees surpasses $65 billion, Fitch said.
Representatives for Christie did not respond immediately to a request for comment Thursday.
Christie raised public workers’ retirement age and pension costs in 2011, yet the pension system for nearly 800,000 beneficiaries is still in danger of running out of money in the next decade after years of governors and lawmakers who neglected to fund pension costs at their full, legally required levels.
He has proposed cutting public workers’ health-care plans and using an estimated $2 billion in annual savings to fund the struggling pension system. Democrats and public-worker unions are opposed, saying workers already gave concessions to Christie and should not bear the entire cost of fixing a retirement system that politicians left untended for years.
“If implemented in their current form, Fitch believes the reforms could provide notable annual state cost savings and thus improve prospects for future budget sustainability,” analysts wrote. “However, it is uncertain if the proposals will gain significant traction in the current legislative session.”
A lower-end credit rating such as New Jersey’s would, under normal circumstances, lead to higher borrowing costs for major projects such as school construction and transportation projects. But the impact of New Jersey’s nine downgrades has been minimized because the Federal Reserve in recent years has kept interest rates near zero. The Fed has indicated that it may begin to raise interest rates this year.