UPDATE 5-Moody's cuts New Jersey rating a notch on finances

(Changes lead; adds quote, paragraph 7)

By Edith Honan

NEW YORK, April 27 (Reuters) - New Jersey suffered its second downgrade this year on Wednesday after Moody's Investors Service cut its credit rating, tarnishing Gov. Chris Christie's budget fighting reputation as he works to close a $4 billion shortfall.

Moody's said the state's economy is unlikely to recover any time soon and is threatened by its slow economic recovery, rapidly rising expenses, and a lack of specific plans to rebuild its depleted reserves.

Christie blamed the downgrade on his predecessors' policies.

Investors in the $2.9 trillion U.S. municipal bond market have worried for more than a year that the recession would prompt numerous downgrades and even defaults, though historically they have been rare.

So far in 2011, Nevada and Kentucky have also been downgraded.

The rating agency, which cut New Jersey by one notch to Aa3 from Aa2, also cited the Garden State's $31 billion public pension shortfall -- a $37 billion issue that forced downgrades across the country in recent months. Issuers prize high credit ratings because they allow them to borrow money more cheaply.

"To voters, it means the fiscal house is not in order, and the question will be who to blame," said Lee Miringoff, Director of Marist Institute for Public Opinion.

Later on Wednesday, Fitch Ratings revised New Jersey's credit outlook to negative from stable, citing "mounting budgetary pressure" and a significant unfunded pension liability. Fitch currently rates New Jersey GOs AA.

In February, Standard & Poor's downgraded New Jersey from AA to AA-minus. Moody's on Wednesday also said it doesn't see an further action on New Jersey's rating.

Since taking office last year, Christie has been a rising star in the Republicans party, touted as a fiscal conservative and mentioned as a possible presidential candidate. He also has been criticized for skipping last year's pension fund contribution.

Christie said the problems Moody's listed were "legacy issues," meaning he inherited them. In a statement, he called for bipartisan cooperation in reining in the costs of pension benefits, weakening civil service protections, and no longer paying public employees for unused sick time.

New Jersey's legislature is led by Democrats, who have resisted some of these proposals. Christie added: "Moody's noted our decreased reliance on one-shot revenues in the fiscal year 2012 budget, our proposed pension reforms to reduce long-term liabilities and a steady increase in pay-as-we go capital transportation funding to reduce long-term borrowing needs."

David Manges, a municipal trading manager at BNY Mellon Capital Markets in Pittsburgh, said the credit downgrade might prove useful for Christie, who is pushing the Democratic-led Legislature for additional cost savings.

"My sense is it will give him (Christie) ammunition to reinforce his idea of fiscal discipline; this will be a club with which he can beat his opponents," Manges said.

Pressure on New Jersey's financial position could continue for three to five years, while reform measures of the state's pension system will not show a material positive impact for seven years, said Baye Larsen, a senior analyst at Moody's.

"Pension and other post-employment benefit liabilities will continue to grow rapidly, further pressuring the already high-debt state," Moody's said.

New Jersey's bonds did not trade after the Moody's downgrade, mainly because traders had anticipated the action, according to Municipal Market Data, a part of Thomson Reuters.

"New Jersey being downgraded is completely factored in to the market and based on the stable outlook that you see, there's perhaps some upside to the trading value of the bonds," said Michael Pietronico, chief investment officer of Miller Tabak Asset Management in New York.

Whether New Jersey's debt commands higher prices in coming days depends partly on its borrowing plans. "A lot of (any rise in prices) will be driven by supply," Pietronico said.

About $12.1 billion of general obligation debt was affected by the downgrade.

Moody's also downgraded the ratings on the state's $32.9 billion of annual appropriation and moral-obligation-backed bonds payable from the general fund to A1 from Aa3 as well as on the enhanced ratings assigned to the state's intercept programs. (Additional reporting by Joan Gralla in New York and Karen Pierog in Chicago; Editing by Diane Craft)