NEW YORK (Reuters) - The outlook for New Jersey’s debt rating has turned negative, Moody’s Investors Service said, citing the state’s “long history” of failing to put enough money into its state pension fund.
A rating agency’s decision to lower an outlook to negative is significant because it implies that the debt rating of a public entity, whether it’s a city or a state, or a company may be downgraded. All issuers of debt — from states to corporations — prize high credit ratings because they help them sell debt at lower interest rates.
New Jersey’s negative outlook from Moody’s affects $2.9 billion of general obligation bonds and $29 billion of so-called appropriation- and moral obligation-backed debt, the rating agency said in a statement released late on Wednesday.
Other problems that widen New Jersey’s future budget gaps include the likelihood that the state’s economy will recover slowly.
Making matters worse: Hundreds of billions of dollars of aid that Congress approved to bolster the coffers of cash-strapped states during the recession will end in December.
Moody’s, which rates New Jersey “Aa2,” said Gov. Chris Christie had made “notable spending reductions” in the fiscal 2011 budget and proposed an “aggressive agenda for pension reform.”
That said, the rating agency issued several caveats, including this one:
“However, these initiatives, which require legislative approval and are likely to face legal challenges from the state’s unions, are not expected to result in improvement in the funded status of the pension system over the intermediate term.”
Christie, a Republican, has made national headlines for demanding that state and local workers accept less generous pay packages. His push to rein in compensation has aggravated the pension underfunding problem, according to his critics, including union leaders.
The credit rating agency noted improvements in the pension system will be delayed by Christie’s decision “to phase in full funding of the actuarially required pension contribution over a seven-year period beginning in fiscal 2012.”
While the risk posed by New Jersey’s variable-rate debt is “manageable,” Moody’s noted there is a possible hazard: Getting lenders to renew letters of credit that now back $1.6 billion of this kind of debt. The letters of credit expire in fiscal 2011.
The credit rating agency also said New Jersey “historically” has been one of the biggest users of swaps in the municipal market, and the state’s contracts had a negative value of $618 million when marked-to-market” as of May 31.
Moody’s also revised the outlook for $11.1 billion of New Jersey Transportation Trust Fund Authority bonds to negative, noting that much of the debt is repaid by state appropriations, some of which now appear more risky.
“Due to the risk of nonappropriation, we rate these bonds one notch below the state’s general obligation rating,” Moody’s said.
The transportation bonds command a “Aa3” rating from Moody’s.
Reporting by Joan Gralla; Editing by Jan Paschal