A fat budget, money in the bank and credit upgrades. NJ is seeing a financial turnaround
New Jersey’s feeble financial health has been well known for years, with dismal bond ratings, unfulfilled pension payments and plenty of budgetary white-knuckling.
But a significant turnaround seems to have happened in Trenton.
Gov. Phil Murphy, a former Wall Street banker, came into office in 2017 on a promise of restoring the state’s fiscal health, and it seems he is delivering. Helped by flush revenues and federal COVID-19 relief funding — luxuries his predecessors didn’t have — Murphy now leads a state that not only can pay its bills but has more money than it knows what to do with.
And after a record number of credit downgrades under past governors, New Jersey has received upgrades from all three Wall Street agencies in the last several months. And there could be more to come.
Doug Offerman, a senior director at Fitch, one of the three major rating agencies, pointed out that the governor “projects a surplus for the fiscal year that we’re in now,” and that contributes to the upgrade as well.
“We think that New Jersey is in a better position than it was just a few short years ago, and that’s something that we wanted to recognize in the rating,” Offerman said. “If they can continue to make progress on high long-term liabilities and continue to focus on maintaining reserves, they could be in a position for a stronger credit rating.”
The governor’s office is quick to point out the changes from what was the norm in New Jersey.
“There could not be a starker contrast between this progress and the failed approach from prior administrations that saddled the state with over a dozen credit downgrades and ballooning pension fund costs that were ignored year after year,” Alyana Alfaro, a spokesperson for the governor, said in a statement. “Governor Murphy believes that we must continue to make fiscally responsible choices and focus on affordability as we work to ensure that New Jersey is in a better position for the future.”
Murphy is, however, following a payment plan for public employee pensions laid out in law by his Republican predecessor Chris Christie after governors of both parties shortchanged the fund that pays for workers’ retirements. And critics of Murphy note he’s helped by federal money and that homeowners still pay more than $9,000 a year on average for property taxes, a national high.
Property taxes:Check the mail, because rebate details are coming soon
Murphy’s record-high nearly $51 billion budget for this year includes a property tax rebate program expected to save homeowners and renters hundreds of dollars or more. The spending plan includes other benefits of the state’s newfound solvency, such as a $6 billion surplus, a “sales tax holiday” on school supplies last month, waiving fees for marriage and driver’s licenses this summer, and full funding for the ANCHOR tax rebate program and the pension payment.
Covering public pensions
That payment of $6.8 billion again covers the state’s obligation to the public pension system. Last year’s payment of $6.9 billion was the first full payment into the system in nearly 25 years. Treasurer Elizabeth Maher Muoio pointed out in a statement that the Murphy administration has contributed more than $25 billion, “twice the total amount contributed by the previous six governors combined” to the fund.
Because past governors failed to set aside the state’s full contribution each year for public employee pensions, New Jersey lost out on investment gains and the amount the state owed its workers grew exorbitantly.
Alan Zalkind, director of the Center for Government Services at Rutgers University, said a pension was an attraction to government employment that “workers look forward to.”
“It gave them some security after they retired,” he said. “It’s a guaranteed benefit. They don’t have to worry about their pension 20 years from now.”
He noted that because the state didn’t always make its full contribution, it “threatened the security of the pension program,” because although it “may not have gone bankrupt,” it “would not have enough resources to pay for its obligations.”
Credit upgrades, finally
The three major rating agencies — Moody’s, Fitch and S&P Global Ratings — issue scores on states’ general obligation bonds, or the debt they issue, on a scale similar to an individual’s credit score. The lower a state’s score, the higher the interest it pays. And repaying the debt is often borne by taxpayers.
Since the enactment of the 2022 state budget last year, those agencies have upgraded New Jersey’s credit and outlook, another indicator of financial health. The state received its first upgrade in two decades earlier this year, and the “strong” revenue and increased contributions to the public employee pension system were factors in raising the bond rating.
“We think the state set itself up for further improvement by having sort of climbed the mountain in getting to a full pension contribution and taking additional steps to tackle outstanding debt and focusing more on pay-go debt in the future and using some excess resources in paying down existing debt,” Offerman said.
The rating agencies downgraded New Jersey’s credit a record 11 consecutive times after the Great Recession under Christie. But the agencies also downgraded the state several times before that, in the early 1990s and 2000s.
Sheila Reynertson, senior policy analyst for New Jersey Policy Perspective, said the outlook is the “brightest it’s been in over a decade” because of the “tax and budget policies enacted under the Murphy administration.”
“Taxing millionaires and profitable corporations allowed the state to finally pay its bills, with plenty left over to invest in key areas that grow the economy,” Reynertson said. “The last few years are proof that the economy works best when you invest in working families, not tax cuts for the wealthy and well-connected. To build on this success and stay on the right track, state lawmakers need to make sure they sustain these investments, even as federal aid starts to drop off.”
Garden State Initiative President Regina Egea, who served as chief of staff under Christie, is less convinced of the financial turnaround and noted that New Jersey “remains among the most indebted in the country.”
Egea said that rather than increase “revenue streams to cover the ever-escalating cost of government,” as rating agencies suggested, “this administration has chosen to consistently increase the tax rates to grow the top line, ignoring any substantive cost reductions.”
“The state has seen a surge in cash at its disposal from a post-pandemic economic recovery, federal COVID aid, billions in new borrowing and higher taxes on businesses and individuals,” Egea said. “The rating agencies will revert to form in two years or so when the recurring revenue will not be able to cover the momentum in spending that has been created in recent years.”