Caught in a Downgrade Spiral

This week, New Jersey achieved the dubious distinction of having the second-lowest state bond rating in the U.S. New Jersey’s standing is ahead of only Illinois, which has been mired for years in fiscal crisis. Its current rating of A- by Standard & Poor’s puts New Jersey below post-Katrina/BP spill Louisiana, rust-belt Michigan and perennially poor Arkansas. That means that New Jersey offers less assurance to bondholders than almost any other state that it will make interest and maturity payments in full and on time.

How could this happen in a place with such wealth? It has to do with the failure to pay a debt: For years, New Jersey has under-funded its pension fund obligation to state employees. The state now tallies its obligation to that fund at $43.8 billion, although S&P’s more conservative calculation puts it at more than double that amount. Adding to S&P’s concern was the recent deal struck by Governor Chris Christie with the legislature over the Transportation Trust Fund. The deal will increase revenue for the TTF, but reduce estate tax and sales tax revenue by $1.4 billion over the next five years. That’s $1.4 billion that won’t be available for pension fund payments.

This is the 10th such downgrade by a leading credit-rating agency during the Christie administration, and with each one, the cost of borrowing money (by selling bonds) goes up. The upshot of this is that the state will find itself needing to dole out even more money to pay for the bonds it sells to uneasy bondholders at a time when it doesn’t have enough money to pay its existing obligations. That imposes an additional cost on capital projects—roads, bridges, buildings—that the state hopes to undertake with bonds.

With no funding remedy in sight for the pension program, the downward spiral is bound to continue. As the pension fund debt increases, we shouldn’t be surprised if the state sees further downgrades, and more negative consequences for state-funded capital projects.


Photo: Gage Skidmore / flickr creative commons

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