New Jersey 50th Again

Credit risk this time and according to The Bond Buyer teaser:

Despite last week’s downgrades, Illinois’ general obligation paper fares better than New Jersey for relative credit risk, Municipal Market Analytics (MMA) said in a commentary comparing the two lowest-rated states.

Crain’s Chicago Business (CCB) also got a copy of the MMA report and, though the headline implied a toss-up, the excerpts  included in their story clearly show why New Jersey deserves its rank:

For Illinois vs. New Jersey, Municipal Market Analytics asks: Is it better to own the general obligation bonds of a state in the middle of a budget impasse (Illinois) or the bonds of a state with a budget that only contributes to the “continued deterioration of its finances”?

The answer is Illinois, especially because payments on New Jersey bonds require continuing appropriations by the Legislature, while Illinois law makes bond payments automatic.

That may be the answer CCB wants but how could any investor feel secure knowing the New Jersey Legislature has a say in whether they get paid?

“In the near to medium term, we are bearish on the finances of both states as they are facing significant challenges and doing an admirable job making them worse,” the report says.

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Illinois has fewer legal options to cut pensions and retiree health care benefits, but it does have the capacity to raise revenues, the report says. New Jersey has more “theoretical ability” to reduce those costs, but the “state’s high tax burden diminishes its flexibility,” according to the report.

The option New Jersey may be perceived as having is the ability to arbitrarily cut benefits and break contracts which, again, is not a selling point for anyone you are trying to borrow money from.

Fitch Ratings and Moody’s have both reduced their credit scores on Illinois in October, although the downgrades did not raise worries about possible defaults.

New Jersey currently has a higher credit rating than Illinois. Moody’s, for example, rates New Jersey A2, two notches above Illinois’ Baa1. Market Analytics predicts the Garden State will receive a downgrade.

Both ratings agencies “raise concerns over the strain the stalemate will cause on current year finances and the longer term worry that the state’s fiscal position will be inadequate to endure another economic downturn,” Concord, Mass.-based Municipal Market Analytics says.

“It’s a horse race in which you try to pick which one is going to fall more slowly below investment grade,” said Matt Fabian, a partner in Municipal Market Analytics. “It’s a race no investor wants to win.”

Extending the metaphor, another feature of a horse race is that it does end and the Corzine tax-spree that morphed into the Christie debt-spree is something no other state could possibly keep up with – right?*

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* Seriously, if there are people from Illinois out there, please make your points.  I see New Jersey governance at all levels (from the politicians who make the decisions to the taxpayers who are uninformed as to those decisions) and I can’t imagine a more dysfunctional system.  If Illinois has one, do tell.