S&P Lowers NJ's Debt Rating to AA- on Pension Funding Concerns

(February 10, 2011) — Standard & Poor’s has lowered its ratings on the state of New Jersey’s general obligation debt to AA- from AA.

“The lower rating reflects our concern regarding the stresses from the state’s poorly funded pension system, substantial post-employment benefit obligations, and above-average debt levels,” Jeffrey Panger, credit analyst, said in a report. “The downgrade also reflects the application of Standard & Poor’s newly adopted criteria on U.S. states, which more transparently incorporates debt, pension, and other post-employment liabilities, along with other rating factors.”

New Jersey has about $2.6 billion of GO debt, $27.8 billion of appropriation-backed debt, and $2.5 billion of moral obligation debt outstanding. According to the S&P, which rates the state’s outlook as stable because it believes it will “continue to manage its structural budget imbalances proactively,” the New Jersey has nearly $33 billion in debt, placing it at a debt level among the highest in the nation. The only states with worse credit ratings are California and Illinois, widely considered to be in the steepest financial trouble. Credit weaknesses, the S&P said, include:

• A large unfunded pension liability;
• Significant postemployment benefit obligations; and
• An above-average debt burden.

At a town hall meeting, state Governor Chris Christie said the downgrade could have been avoided if Democratic lawmakers approved his pension overhaul, the Star-Ledger reported.

In October of last year, the New Jersey State Investment Council reported that it planned to boost its alternatives target to 38%, while the state’s pension fund for teachers and government workers is negotiating reductions in fees and expenses for private investment managers. While the $70.2 billion pension system’s current statutory limit for alternatives is 28%, the new regulations would reportedly allow as much as 38% of its portfolio into the asset class.