New Jersey Ratings On CreditWatch

S&P announced today in a press release that it  has placed its ratings on New Jersey’s general obligation (GO), appropriation-backed, and moral obligation debt on CreditWatch with negative implications, which means that they could lower the rating within the next 60 to 90 days depending on the outcome of the state’s budget deliberations and other developments.

Among the disturbing aspects of New Jersey’s situation that S&P noted:

Almost five years after the official start of the economic recovery, New Jersey continues to struggle with a growing structural imbalance and stands in stark difference to many of its peers who registered sizeable budgetary surpluses in fiscal 2013. Although the weaker than forecasted revenue performance is not unique to New Jersey, in our view the magnitude of the state’s overall structural imbalance as well as the measures taken to address annual budgetary shortfall have implications for liquidity and the state’s liability profile. We believe the state’s decision to reverse course on its pension reform is the result of a revenue forecast that is not aligned with current economic conditions in the state, rapidly growing fixed costs, and limited flexibility with which to address any significant deviations from the forecast. 

A state that defaults on its pension obligation to balance its budget will have only one place to go when that pension is pay-go: bond defaults.

Although in his State of the State and budget messages, the governor called for additional pension reform efforts, there has been no formal proposal and legislative support for another round of pension reform is unclear. 

Backroom deals cobbled together by the ignorant is no way to get out of this mess.

The constitution requires the governor to adopt a balanced budget and to end the year in balance. This is important because the state has approximately $3.2 billion–primarily its tax and revenue anticipation notes ($2.6 billion TRANs)– in debt coming due between June 2 and June 30. The state has indicated that as of May 28, it had $2.43 billion in cash. Additionally, the revised budget leaves $300 million in its budgetary reserve. Should June collections fall short of target, the state could use its reserve or reduce its pension contribution further to offset any shortfall.

Even that reduced $695 million pension payment due this month is not a sure thing.

Prior to the pension reform act of 2011, several New Jersey governors, including Gov. Christie, had underfunded the state’s pension systems. However, the pension reform law (Chapter 78, P.L 2011) includes a provision that clearly defines the annual required payment as the normal cost plus the amortization of the unfunded liabilities and allows for pensioners or the plan’s board of trustees to sue in the instance of non-payment. Although several New Jersey workers’ unions have announced their intentions to sue to ensure that the pension payment is made, to the best of our knowledge, there have been no lawsuits filed to date. However, given what is at stake, we believe that this is a question of when, and not if, a lawsuit is filed. In our experience, pension litigation tends to be highly contested, drawn out, and typically gets appealed to the highest courts and could leave the state dealing with a contingent liability for years to come. In addition to any cost for legal fees, there’s always the potential that the state, if unsuccessful, could experience additional budgetary and liquidity pressure should it have to make a retroactive payment.

Plus there is the COLA reinstatement lawsuit that should be decided this month but, after appeals, it may take a few more years for participants to see those back payments though by then there may be nowhere for that money to come from except through defaulting on GO bonds, which is what S&P obviously views as possible, if not probable.

29 responses to this post.

  1. Posted by Tough Love on June 3, 2014 at 12:51 am

    Quoting … “A state that defaults on its pension obligation to balance its budget will have only one place to go when that pension is pay-go: bond defaults.”

    John, Think positive, instead of negative. Hopefully NJ will not default on the bonds but simply haircut the pensions outright, or if necessary via the issuance of worthless IOUs.

    Such a haircut would simply takes away what was NEVER justifiable in the first place, and was simply granted by self-serving, taxpayer-betraying politicians bought-off with Union money and election support.


  2. Posted by Anonymous on June 3, 2014 at 1:06 am

    TL all kidding aside nobody will escape unscathed. I think deep down you may know realize that,


    • Posted by Tough Love on June 3, 2014 at 1:32 am

      A likely outcome.


    • Posted by FormerJerseyan on June 3, 2014 at 12:05 pm

      Of course, the taxpayers at present are the only ones being “scathed”. No reason to think the future will bring any other result, though some sharing of the pain for a change would be good.


      • Posted by Anonymous on June 3, 2014 at 3:06 pm

        Not really. Taxpayers for many years have been skipping payments, which along with double dippers and political cronies have gotten us to where we are now. It is not your average DPW worker, teacher or cop that caused this problem.


        • Posted by Tough Love on June 3, 2014 at 3:26 pm

          Oh BS…….

          ALL Public Sector pensions (when factoring in the MUCH richer formula factors, the full unreduced young retirement ages, and the post-retirement COLA increases … likely to be reinstated) are TYPICALLY 3-4 TIMES greater in value at retirement than the pensions of their EQUALLY PAID Private Sector counterparts….. and 4x-6x greater for safety workers.

          It is THAT grossly excessive generosity that drives the need for the ridiculously high “funding”.

          Address that ROOT CAUSE by 50+% reductions in the pension accrual rate for the future service of all CURRENT workers, and we MAY (with some good fortune on the economy) be able to BEGIN to address this problem.

          And I agree that the “workers” didn’t “cause” the problem, but PUBLIC Sector workers are indeed the financial beneficiaries of the collusion between your Unions and our elected officials that resulted in the granting of these grossly excessive pensions. Specifically, the BUYING of the favorable votes of our elected officials via Union campaign contributions and election support.


        • Posted by marbs on June 3, 2014 at 3:31 pm

          I agree. All those homestead rebates etc had to be paid for somehow.

          There should be no double dipping when I retired I could have gone back to work as a civilian doing a job (dispatching or clerking) that officers on light duty are assigned and so are regular duty officers. I did not feel this was right so I declined the position.

          I chose to continue my career for a time as a Police Officer at a PRIVATE University in NJ.


          • Posted by Anonymous on June 3, 2014 at 9:31 pm

            That’s exactly where the money went, homestead rebates. The state cannot simply choose not to pay—that is not an option. As we say in Detroit, pensioners will get their money ahead of bond holders, but both will be paid as the state can’t declare bankruptcy–nor may they reduce vested pensions.

            TL can whine all he wants, but the horse is out of the barn–time to pay up.

          • Posted by Tough Love on June 3, 2014 at 9:55 pm

            Anon, Denial is not a solution………..

  3. Posted by Anonymous on June 3, 2014 at 7:40 am

    john if the colas are reinstated that mean the state would have to start paying them immediately, meaning what would be due at present, not from the past.


    • Posted by JM on June 3, 2014 at 8:39 am

      The court would most likely grant the State or the Plaintiffs a stay pending appeal of any decision.


  4. Posted by JM on June 3, 2014 at 8:37 am

    John: Thank You for posting more of the S&P statement than the Star Ledger did in their report.


  5. Posted by JM on June 3, 2014 at 9:07 am

    Both Christie and the treasurer Sidamon-Eristoff have hinted they are going to try to revamp the system by mimicking the Rhode Island plan. I have skimmed the 45 pages of the plan available online (reading mostly the synopsis’ at the end of each chapter).this is what my take is on the plan in layman’s terms.

    1. Current retirees and those within a specified number of years from retirement are NOT affected. They will continue to receive their Defined Benefits as promised.

    2. Other employees and future hires will be put in a hybrid system consisting of a defined benefit plan and a 401K type plan (to which the State would contribute).So employees will still receive a defined benefit (although less then before) and will subsidize their retirement in the amount that they see fit.

    3. COLA will be paid on the defined benefits of those currently retired and future retirees every 4 years. (This may be modified but appears to be a compromise number)

    4. There are age and service modifications but vary by plan.

    The Rhode Island plan makes it clear that the State recognizes that employees close to retirement and those retired already do not have the time to completely alter their financial plans for retirement but those who have many years to retirement will know in advance their defined benefit amount and can calculate and save for their financial needs.

    This to me seems like a fair plan for all, current retirees who were promised a certain amount and those employees who do not have the time to set up retirement savings accounts that would be of any significant value are protected. Those employees who are far from retirement may feel some resentment toward the State but their contributions to the defined benefits portion of their retirement will be lower and who knows maybe their savings plans will do better than the State. A potential employee can also weigh these pension options before accepting a position.


  6. Posted by JM on June 3, 2014 at 9:13 am

    A recent article in the Star Ledger online (that disappeared after a few hours, was a call made?) quoted the head of the Division of Investments stating that the investments held by the pension funds earned in excess of 12% so far this past fiscal year.


    • You mean stock markets temporarily bubbled up. How much did the funds earn in cash, to pay benefits? And if the stocks are sold to pay benefits, how much will be available to pay benefits next year?


  7. Posted by Anonymous on June 4, 2014 at 6:58 am

    Christie has two major objectives. (1) privatize public education to benefit his well connected cronies and friends and (2) privatize the pension system to benefit his well connected cronies and friends.


    • Posted by Tough Love on June 4, 2014 at 9:28 am

      Or ….

      (1) perhaps charter schools result in a better education … especially for the disadvantaged, and
      (2) The pension changes will only bring them WAY DOWN to the level the should have been all along …comparable to that of Private Sector taxpayers


  8. Posted by Anonymous on June 4, 2014 at 6:59 am

    The retirees, meaning those who have been bona fide retirees at the time the new legislation came into effect, legally are entitled to cost of living adjustments. These are legacy costs for the state.Their performance has been completed. It is not executory. This in not as onerous as it may appear, and is a great win for the governor in that this is analogous to the “dying off” of the World War II veterans. It is a defined group of people that becomes smaller with each passing day. No more numbers are added to their ranks. The caboose is finally in sight!
    New Jersey gave not only contractual rights to pensioners, who have already retired, but also gave non-forfeitable rights as discussed in this article. Only post-retirement health care benefits are exempt. The statute is crystal clear. It is not ambiguous at all.
    Retirees, at the time of the new legislation, must also prevail due to state borrowing practices,otherwise, New Jersey would no longer be able to borrow any money in any bond offering. Period. Entities loaning money need clarity and assurances of repayment without discussing debt limitation clauses and one legislature binding another. The money would go elsewhere, and very quickly. Lending sources would evaporate overnight. I was informed of this by a great source.
    Also, retirees have strong detrimental reliance issues. Many retirees are paying some amount of money for health care in retirement, and have been told that their cost of living adjustments would help to offset the yearly increases in premiums. The people who retired, before the law was changed, relied upon the law in existence at the time, and relied to their detriment. The premiums rise with no corresponding increase at all to the pension amount. Many would have stayed “on the job” had they known. New Jersey case law supports retirees who have relied upon the existing law at the time of retirement. In fact, it IS the law.
    Finally, many who retired have a spouse as a designated beneficiary. The beneficiary’s pension benefit as a survivor would increase along with the corresponding cost of living adjustment. The retired worker no longer has the cost of living adjustment and now does not qualify for additional life insurance since he or she is no longer an insurable risk. This is a very strong collateral issue also touching upon detrimental reliance from which there is no means to extricate oneself. Had one known of no cost of living adjustment, one would have applied for insurance earlier while still healthy enough to obtain the needed coverage.
    Posted by marc on May 14 at 8:13 A


    • Posted by marbs on June 4, 2014 at 8:48 am

      Hopefully the three appellate court justices will see and interpret the law in this manner. Not some nontenured superior court judge (Judge Hurd) who would not even write a written opinion on the COLA case. Oh coincidentally Judge Hurd was promoted to Presiding Judge.


    • Posted by Tough Love on June 4, 2014 at 9:32 am

      Quoting …”I was informed of this by a great source.”

      Let me guess …Your Union ?

      All BS


    • Posted by MJ on June 5, 2014 at 6:34 pm

      Anyone “relying” on the government for their retirement or anything else is certain to be screwed. The publics need to learn to rely on themselves. If they were paying attention in the first place to what has been happening over the last 15-20 years, surely they would have realized that they will not be taken care of for the rest of their lives. They deserve what they get, nothing more and nothing less than any of the rest of us who have paid our own way and theirs too.


  9. Posted by Anonymous on June 4, 2014 at 7:17 am

    Christie also repeated his contention that the state cannot afford to pay more for the healthcare costs of retirees than it pays for active employees, but that contention is misleading: The state pays the healthcare costs of 93,600 state employees, while it pays the retiree healthcare costs not only of its 60,000 retired state workers, but also of New Jersey’s 91,700 retired teachers, whose preretirement healthcare costs were paid by the school districts that employ them, according to 2013 statistics contained in actuarial reports for the seven state pension systems submitted to the New Jersey Division of Pensions and Benefits.

    With teachers excluded, the state pays $1.067 billion for the healthcare costs of active employees and $574.6 million for healthcare coverage for state government retirees.


  10. Posted by Anonymous on June 4, 2014 at 1:01 pm

    Hey TL, if they reinstate COLA. Publics will be getting richer before they get poorer. maybe you should jump on the bandwagon before it is too late. but lets face it you would have done that years ago if you really thought it was the wonderful gravy train that you descibe. Alas, we know you dont think it is now, do you.


    • Posted by Tough Love on June 4, 2014 at 9:02 pm

      Hopefully, Gov. Christie will begin the WELL-DESERVED process of dismantling the current grossly excessive Public Sector pension and benefit system in short order.

      I couldn’t possibly work in the Public Sector. I like being as productive as possible and with your Unions protecting the lazy and incompetent, everyone is encouraged to slow down.

      Public Sector Unions should not be allowed … or if they must be, Taxpayers (or their elected representatives) certainly shouldn’t be “bargaining” with them. FDR recognized this problem many decades ago.


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