Moody's: Pension case poses risk for N.J.'s credit rating

New Jersey's credit rating, already the second worst in the nation, could take a further hit this year if the state Supreme Court rules against the state in a lawsuit that challenges a 2011 law that suspended pension cost-of-living adjustments, Moody's Investors Service said in a report Thursday.

"New Jersey faces outstanding pension litigation that, if decided against the state, would meaningfully worsen its pension liabilities and negatively affect its credit profile," said Baye Larsen, a senior analyst and vice president with Moody's.

A low credit rating increases the cost of borrowing because it signals greater risk to investors.

The state's general obligation bonds have been downgraded a total of nine times by the three major Wall Street ratings agencies (including Moody's) since Gov. Christie took office in 2010.

That has provided fodder for Christie's rivals in the Republican presidential race.

The 2011 law overhauled the pension and health benefits systems for public employees. In addition to freezing cost-of-living-adjustments (COLAs), the law raised the retirement age, required workers to contribute more toward their pensions and health plans, and required the state to contribute more to the pension system.

Christie reneged on that last provision, and public-sector unions sued, arguing the state had breached workers' contractual rights, which they said were protected by the state and U.S. constitutions.

The high court struck down that part of the law, ruling it violated a provision of the constitution that prohibits the Legislature from creating long-term debts without voter approval.

But that decision did not consider the COLA question. The case dates back to 2011, when 26 retired government attorneys sued Christie and the state, alleging the suspension of COLAs violated their nonforfeitable right to basic pension benefits when they retire, as established by a 1997 law.

If the Supreme Court were to overturn the freeze on COLAs, the unfunded liabilities for New Jersey's two biggest pension plans -- the Public Employees' Retirement System and the Teachers' Pension Annuity Fund -- would increase by 33 percent, Moody's said.

Moody's projects that the unfunded liability for the entire pension system would grow from $40 billion to $53 billion.

A court decision against the state would also increase pressure on the budget and accelerate the depletion of pension plan assets, Moody's said. The plans for teachers and state workers could run out of money as early as 2027.

The state's credit trajectory could also be altered by whether and how lawmakers enact changes to the underfunded pension and health benefits systems for public employees, Moody's said. Christie's plan to move from a defined benefit plan to a 401(k)-style system -- which Moody's said would improve the state's credit profile -- hasn't gained traction in the Democratic-controlled Legislature.

Instead, Democrats are pushing a constitutional amendment that would require the state to make quarterly contributions to the pension system. An amendment would require voter approval.

"Going forward, making full annual pension contributions would gradually improve the pension fund's aggregate funding position, but significantly reduce the state's near term budget flexibility," Moody's wrote.

It added that "making large quarterly payments would shift the state's cash-flow needs, given the timing mismatch between revenues and expenditures."

"This shift could challenge the state's liquidity, particularly at its current, low reserve levels," Moody's wrote.

Policymakers must also replenish New Jersey's fund for road, bridge, and rail projects. The Transportation Trust Fund is set to run out of money on June 30, the end of the fiscal year.

A new reauthorization will alter the state's debt levels and could change its tax structure, Moody's said, noting that lawmakers are considering increasing the gas tax and eliminating the estate tax.