Wall Street’s mixed record for the NJ budget

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Credit: (AP Photo / Mark Lennihan)
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Over the past decade, a major recession and global pandemic have strained an already saddled state budget with large debt and unfunded liabilities, and New Jersey bond ratings have fallen among the lowest. lowest of all US states.

But a large and unexpected tax windfall last month gave New Jersey a golden opportunity to get its budget back on track.

In the budget approved in late June, Gov. Phil Murphy and his fellow Democrats who control both houses of the Legislature took a number of steps to address some of the state’s long-standing fiscal challenges.

Solve state tax problems

These actions – including creating a new debt relief fund and setting aside enough income to cover a record civil service pension contribution in a single installment – raised hopes of a possible improvement in bond ratings, which Connecticut officials celebrated recently.

Earlier this week, one of Wall Street’s major rating agencies released a new assessment of New Jersey bond ratings in the wake of this new budget that brought good news.

Moody’s Investors Service analysts highlighted New Jersey’s “improved governance and fiscal management” as they decided to raise the government’s bond outlook up a notch from “stable” to ” positive ”.

“The revised positive outlook reflects the state’s better-than-expected financial situation and improved governance profile that will enhance fiscal flexibility during the coronavirus recovery,” Moody’s said.

Analysts worried about rising spending

However, Moody’s analysts did not upgrade New Jersey bonds. Instead, Moody’s left New Jersey’s general bond rating at “A3,” which is several steps below the triple-A debt rating the state boasted of years ago.

The FY2022 budget dramatically increased spending year over year, in part using the surplus as a one-time source of revenue. This is fueling concerns about how the state can support increased spending on funding its pensions, supporting K-12 education and other programs in the years. to come up.

“The increase in spending on recurrent programs in FY2022 … (makes) the state vulnerable to fiscal risks in a period of continued uncertainty …”

“The increase in spending on recurrent programs in fiscal year 2022, including education, creates structural budget gaps that make the state vulnerable to fiscal risks in a period of continuing uncertainty and can challenge the state’s ability to maintain its path of improvement, ”Moody’s said.

While an improvement in bond ratings remained elusive for New Jersey, Murphy and state treasurer Elizabeth Maher Muoio released statements highlighting Moody’s decision to revise New Jersey’s credit outlook.

This is Moody’s second such outlook adjustment to come this year, signaling investors that New Jersey is moving in the right direction.

“Over the past four years, we have approached the tax challenges we have inherited, not as hurdles, but as opportunities to straighten our tax ship,” said Murphy.

The administration’s management of the state budget “will bear fruit for years to come,” added Maher Muoio.

Impact of bond ratings

The rating of government bonds can be a key factor in determining how cheap and easy it is to borrow money to fund long-term investments in schools and infrastructure like roads and bridges. that cannot be paid in one budget.

Additionally, bond rating downgrades, such as those suffered by New Jersey last year amid the initial economic turmoil caused by the coronavirus pandemic, may have political implications for a sitting governor like Murphy, who must be re-elected in November.

New Jersey also suffered a series of bond rating downgrades during the tenure of former Republican Gov. Chris Christie after the state experienced a slow recovery from the Great Recession of 2007-2009, and Democrats frequently have underlined these degradations when they questioned the management of the State by Christie. budget.

Conversely, bond rating improvements can give investors the confidence to invest in states like New Jersey – and they can also give governors and lawmakers a huge boost.

Connecticut bond rating improvement

Earlier this year, officials in neighboring Connecticut announced the first upgrades to their state’s general bond rating in decades after Connecticut saw its own large increase in income.

“We have made enormous progress in just a few years and the credit rating agencies are now taking note,” Gov. Ned Lamont, a Democrat, boasted in a May press release.

Unexpected tax revenues from New Jersey and borrowing authorized by Murphy and lawmakers last year to support annual spending during the pandemic helped generate a projected budget surplus of $ 10 billion this year in late June.

In response, Murphy and lawmakers created a new deleveraging and debt prevention fund, and they also earmarked $ 3.7 billion to repay existing debt and fund new projects on a pay-as-you-go basis. and to measure ”to avoid the need for more time. -the term loan.

An additional $ 5.8 billion in the new budget was deposited into the civil servants’ pension fund as a lump sum earlier this month, marking the first time in more than a decade that such a pension contribution was paid at the start of a fiscal year rather than later, according to the Treasury Department.

Meanwhile, nearly $ 2.4 billion will also remain engulfed in the state surplus, representing about 5% of the total planned spending for fiscal year 2022 of $ 46.4 billion, according to budget documents.

More work to do

Yet despite praise for “New Jersey’s recent commitment to more aggressively tackle its liability burdens,” Moody’s latest review also raised concerns about the need to “restore structural fiscal balance. Making it clear that New Jersey still has work to do.

And with preparations for the next annual budget set to begin soon, analysts have listed for Murphy and lawmakers some of the actions or events that could trigger an improvement in government bond ratings.

On this list were “the implementation of structurally balanced actions to close the budget gaps” and an “articulated strategy for a sustainable full financing of pension contributions”.

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