New Jersey landed in the unwelcome company of Illinois and California Wednesday when Standard & Poor’s downgraded the state’s general-obligation bond rating to third worst in the nation.
But while a political hit to Gov. Christie — whose administration drew the credit rating agency’s concern for relying on one-time fixes to fill budget holes — the downgrade will likely have little effect on state finances, several experts said.
“Financially, the impact is going to be modest. It's not a serious increase in their costs to borrow,” said Matt Fabian, managing director of Municipal Market Advisors, a research firm, in Connecticut.
The drop in the bond rating — from AA- to A+ — could increase the state’s borrowing costs by 10 cents per $1,000, “which is really not much in the scheme of things,” Fabian said. New Jersey hasn’t had trouble selling bonds; the interest is exempt from income tax, which holds significant appeal in a high-wealth state, Fabian said.
The bigger impact, experts said, is one of political cost. “For the governor and current management, this is a clear message that they need to improve,” Fabian said.
In terms of perception, “you don’t want to be the governor that’s had the rating downgraded,” said David Rousseau, who served as deputy state treasurer under Democratic Govs. James McGreevey and Jon Corzine and also treasurer under Corzine. He is now a budget and tax analyst for the left-leaning New Jersey Policy Perspective.
Standard & Poor’s cited “a trend of structurally imbalanced budgets” that are balanced with the help of one-time revenue sources — including savings from lower pension-fund payments this year — as a prime reason for the downgrade.
The agency also noted the state’s “large and growing unfunded pension liability.” New Jersey is among the top five states with the highest debt and unfunded pension and health benefits liabilities, S&P analyst John Sugden said Thursday.
With those pressures and state revenues not growing as quickly as expenditures, Sugden said, the agency predicts New Jersey will continue to depend on non-recurring revenue sources to balance its budget.
Kevin Roberts, a spokesman for Christie, said the governor had reduced the state’s reliance on one-time measures since fiscal year 2010, from 13.2 percent to 2.8 percent of the budget.
He also contended that the rating downgrade supported Christie’s argument that more changes to the pension system are needed.
“S&P’s action actually underscores what the governor has been saying since January,” Roberts said, calling it “time for the Legislature to come to terms with the reality of this problem and commit themselves to further reforms.”