Upgrades buoy New Jersey with potential recession ahead

Bonds

New Jersey faces the uncertain economic conditions ahead with historic reserves, a trimmed-down debt profile, and a slew of upgrades from the major bond rating agencies.

The state has received six upgrades in a little over a year, including four in April alone, one from each of the four major rating agencies.

The Kroll Bond Rating Agency followed Fitch Ratings, Moody’s Investors Service, and S&P Global with its April 28 upgrade of the state’s general obligation bonds.

KBRA raised the rating to A-plus from A, applying to roughly $5 billion in GO bonds sold by the state.

Gov. Phil Murphy called it “a grand slam” for New Jersey and “proof positive that our efforts to budget responsibly have paid off.

“A lot of hard work has gone into this series of upgrades, and we are well-prepared to weather any storms,” he said in a statement.

It marked KBRA’s first upgrade of New Jersey since it began keeping tally in 2015.

It lifted its rating outlook to positive in January 2022. Following the upgrade, the outlook is now stable.

Like its counterparts, the rating agency cited the state’s improved fiscal footing, anchored on the administration’s continued dedication to meeting full annual pension obligations.

“That was layered against a backdrop of New Jersey’s stronger financial position, including reserves up significantly from where they were,” said Douglas Kilcommons, KBRA’s New Jersey analyst. “Historically that has not been the case.”

A few years ago New Jersey’s fiscal picture looked drastically different; its unfunded pension obligations were some of the highest in the nation, debt was mounting, and its rainy day fund had been run dry.

Murphy’s election in 2018 saw a shift away from some of those practices and a prioritization of funding long-term liabilities.

Meeting those long-term obligations became a fixture of annual budget proposals and since billions have gone towards debt defeasement while the state’s reserve coffers were filled to a comfortable $9.5 billion, the highest level recorded.

The state made its first full annual actuarially based pension payment in fiscal 2021, bucking a 23-year streak of underpayments that left it the overleveraged pension fund weighing on New Jersey’s overall fiscal profile.

It continued to meet those annual pension obligations fully over the following years, marking three consecutive full payments by fiscal 2023.

The state’s finances had reached “the right inflection point” to take action, said Karen Daly, head of KBRA’s public finance group.

“You’re always going to have ups and downs, you’re always going to have recessions that come and go,” Daly said. “Over the course of time, you’re looking for a year in and year out commitment to financial stewardship.”

The three other rating agencies mentioned similar long-term funding commitments as key to their April upgrades. 

S&P pointed to “better pension funding levels and improved structural balance” in its upgrade to A from A-minus of the state’s GO rating and Moody’s “a solid economic recovery” and heightened attention to reserves in its move to A1 from A2.

Fitch echoed that rationale while also pointing to New Jersey’s effective use of “the fiscal momentum of recent years to accelerate progress on its long-term fiscal and liability challenges” as it upgraded New Jersey to A-plus from A.

“Solid economic performance matched by robust revenue growth has helped New Jersey to shrink its liabilities,” the report said.

Kroll’s Kilcommons said the state also deftly navigated the COVID-19 economy, utilizing higher-than-expected revenues, robust federal funding levels, and deficit financing deals to ensure it continued to meet long-term obligations in a depressed marketplace.

Despite being a year overshadowed by inflation, rising prices, supply chain difficulties, and the looming recession, the state’s collections remained robust in 2023 and surpassed original expectations, resulting in a $500 million surplus.

Murphy’s newest budget proposal also made room for full payments.

The proposed $53.1 billion spending plan for fiscal ’24 beginning in July largely avoids new spending while continuing to direct funds towards meeting in full New Jersey’s host of long-term obligations.

It was crafted to “prepare New Jersey for any national or global economic uncertainty,” Murphy said in an address to lawmakers. “Should one occur we will be on a far stronger footing to react in real-time to ensure that critical investments can continue, that our economy can be backstopped.”

The budget would allocate $2.3 billion to pay down existing debt or fund pay-as-you-go capital improvements while making the year’s full contribution to the pension system for what would be the fourth year in a row.

Continuing that commitment over time was a “key element” for KBRA’s upgrade Daly said as “historically the issue around pension funding has had its ups and downs.”

While the state did skillfully leverage “different avenues to take advantage of paying down debt,” New Jersey “wasn’t out of the woods yet,” Marc Pfieffer, assistant director at Rutgers University’s Bloustein Local Government Research Center, said.

“Our current financial condition is based on the decisions that have been made over the last 12 months and inflation was not part of it,” Pfieffer said. “People are starting to realize that the future is not terribly rosy at the moment with the uncertainty of inflation and the uncertainty of a possible recession.”

Even after the recent upgrade, for example, New Jersey remains one of only three states with a single-A tier rating from S&P. The other 47 are rated in the double-A tier or AAA.

New Jersey officials said they expect a short and shallow recession to mark the new fiscal year under which they’ll likely continue to suffer “the slings and arrows of the bond market” considering the inflationary environment, Pfieffer said.

The state’s robust economy was surprising however, he added, driving higher revenues that are key now to padding the state’s budget for a short but potentially bumpy ride ahead

“We should be able to get through the next year or two, which is effectively what the markets are saying,” Pfieffer said. “But everybody has uncertainty once you get out into year three and after that because we just don’t know what the world is going to look like.”

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