New Jersey lawmakers facing full economic plate

TRENTON - New Jersey lawmakers are returning to the Statehouse from summer break facing a withering indictment of the state's finances: two credit downgrades from Wall Street ratings agencies criticizing poor long-term fiscal planning.

The immediate effect, an increase in the cost of borrowing, may not be too burdensome given the current low interest rates. But the downgrades by Standard & Poor's and Fitch Ratings, the seventh and eighth on Gov. Christie's watch, magnify the state's systemic fiscal problems. And it's unclear how the state will address them.

Consider:

The state is $37 billion behind on payments into the pension fund for public workers, a liability that is projected to grow.

Tepid job growth continues to weigh down the economic recovery.

The funding mechanism for transportation projects is $15 billion in debt and will run out of money for projects in mid-2015.

And Atlantic City, once a cash cow for the state, is bracing for economic calamity as at least three casinos will have closed by the end of September, putting thousands out of work. A fourth closed in January, and another filed for bankruptcy last week and is threatening to close in November.

"We've got a heavy plate," said State Senate President Stephen Sweeney (D., Gloucester).

Fitch and S&P, which both downgraded New Jersey's general obligation bonds to A from A+, said the state had continued a trend of relying on one-shot gimmicks instead of recurring revenues to balance the budget.

Christie in June signed a $32.5 billion budget in which he vetoed tax increases passed by Democrats that were intended to enable the state to make a full pension payment for fiscal year 2015. The governor, who cut state payments into the pension system by $2.4 billion over two years to cover a revenue shortfall, says more changes to the system are needed to reduce costs.

The cuts mean New Jersey will have to pay more into the pension system down the road, which the ratings agencies said would increase the financial pressures on the state.

Budgets already have been tight, with slim surpluses to account for the unexpected - including a $275 million shortfall from the fiscal year ending June 30 that was disclosed last week.

So far, the problems remain unresolved. Christie formed a commission to make recommendations for the pension system, though Sweeney said any changes would be a nonstarter "until he tells me how he's going to fund the pension system."

The governor convened a summit last week to address the situation in Atlantic City, but it wasn't apparent after the closed-door meeting what solutions might emerge.

Addressing reporters after the summit, Christie dismissed concerns about the downgrades, denouncing the Wall Street ratings agencies as "significantly overaggressive because they were such bums back in '08 and '09 and left everybody hanging out to dry."

And while 8,000 casino workers will have lost their jobs this year in Atlantic City - a number that could climb to 11,000 if Trump Taj Mahal closes in November - Christie noted that the state's unemployment rate had dropped more than three points since he took office. The rate is now 6.5 percent, compared with 9.7 percent at the start of 2010.

"And so we're making real progress," Christie said at an event in Camden.

The governor, who is weighing a run for president in 2016, is juggling the troubles at home with a heavy travel schedule as chairman of the Republican Governors Association. He went to fund-raisers in Florida and Illinois last week; aides say he will visit South Carolina and New Hampshire this week.

His record in New Jersey could prove "just one more problem for a Christie candidacy," on top of the fallout over apparently politically motivated traffic jams at the George Washington Bridge, said Dante Scala, a political scientist at the University of New Hampshire.

Donors already wary of Christie will be even more so "if he's showing to be less than sharp in fiscal management," Scala said.

New Jersey has lagged the nation in job growth since the recession ended, trailing in 2010 and 2011 before starting to catch up in 2012, according to data from the Bureau of Labor Statistics.

The state was on pace for solid gains in 2013, but the year ended on a weak note, possibly due to a slow Shore season or the harsh winter, said James Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University.

Christie has emphasized private-sector job growth while touting efforts to shrink government. BLS data show the state has added 138,900 private-sector jobs since he took office in January 2010, a 4.3 percent increase.

Pennsylvania added 260,300 private-sector jobs during the same period, an increase of 5.4 percent, and New York 616,400, an 8.8 percent jump.

The relatively weak economy isn't the only drag on the budget.

Pension and health-benefit costs are crowding out spending for schools, transportation, and other services, Christie says.

Under laws passed in 2010 and 2011, the state agreed to make escalating payments into the system, rising to $5 billion a year in the next several years.

The laws were intended to stabilize the pension system after years of skipped state payments; in turn, public workers were required to pay more toward their pensions.

But Christie reversed course after a $1 billion revenue shortfall opened up in the spring.

While a state judge rejected an effort by public-sector unions to force Christie to make the full payment for the fiscal year that ended June 30, unions are still fighting in court to have this year's payment restored.

In addition to its pension liabilities, the state also has a high level of debt compared with other states, putting more stress on the budget, Fitch says.

One source of that debt is transportation. The state's funding mechanism for infrastructure projects, the Transportation Trust Fund, was $15 billion in debt as of June last year, according to a 2013 audit.

For the current fiscal year, revenues from the state gasoline tax and other sources are budgeted to pay more than $1 billion in debt service on previously borrowed money. Lawmakers say more money will soon go toward debt service than will be spent on projects to repair roads and bridges.

Two-thirds of New Jersey's major roads and bridges are of poor or mediocre quality, and 36 percent of its bridges are structurally deficient or functionally obsolete, according to the American Society of Civil Engineers.

Assembly Speaker Vincent Prieto (D., Hudson) has signaled support for an increase in the 14.5-cent-per-gallon tax on gasoline, which hasn't been raised in more than 20 years. Prieto on Friday scheduled legislative hearings on the issue.

Christie has said he won't raise the tax.

Yet the governor's current transportation spending plan, which dates to 2011, is scheduled to run out of money in the middle of 2015. The fund also will soon reach its borrowing limit.