NJ bond ratings cut again

Analysts at Moody's Investors Service have again downgraded New Jersey's general obligation bonds, this time to A1, from A2, and have threatened to cut the rating yet again ("negative outlook"). The state was already rated second-worst in the nation; only Illinois had a lower rating. Both states face large pension obligations they have relentlessly failed to fund. Unless New Jersey cuts pension spending or boosts pension funding, Moody's expects the state pension system will run out of money in the next 9-12 years.

Lower ratings are supposed to reflect higher likelihood that a borrower won't pay what it owes; debt issuers with lower ratings are often forced to pay higher interest rates to get investors to buy their bonds.

"The downgrade to A2 was driven by the lack of improvement in the state's weak financial position and large structural imbalance, primarily related to continued pension contribution shortfalls," Moody's analysts told clients in a report. "We expect liquidity and structural balance to remain very weak through fiscal 2016," and won't improve without "economic growth and further pension reforms," which Moody's considers "uncertain."

The "negative outlook" warning "reflects our expectation that the state's financial and pension position will weaken further before pension reform, if successful, is implemented," Moody's added. "Without meaningful structural changes to the state's budget," Moody's concluded, "the state's rating will continue to fall."

Lower ratings are expected to affect, not just New Jersey state bonds, but also corporate incentive, construction subsidy, highway, port, environmental, sports and convention center, college, municipal, public-school, and other state-backed bond programs.

"Moody's action today once again underscores the urgent need for structural reforms of our public employee pension and health benefits system," state Treasury spokesman Christopher Santarelli told me. Despite reduced reliance on one-time funding (gimmicks) and other "improvement in objective measures of fiscal stability, New Jersey's long-term pension and health benefits liabilities remain serious long-term financial challenges," he added. The administration of Gov. Chris Christie wants the Democratic-run state legislature to enact "recommendations from the nonpartisan Pension and Health Benefit Study Commission" to trim future pensions and reduce taxpayer exposure.

New Jersey's credit quality (like Illinois') is "highly questionable at this point. There is nothing that leads me to believe that this will be the last downgrade for the Garden State," Tom Kozlik, muni bond analyst at Janney Montgomery Scott in Philadelpha, told me. "It is going to be very difficult for NJ to repair its structural imbalance.  As a result I would expect the credit to continue to deteriorate and the rating agencies to downgrade it until  fiscal balance is discovered and maintained."