Fitch Ratings downgraded New Jersey's general obligation rating to A-plus from AA-minus on Thursday, citing an $807 million revenue shortfall announced Monday.
The downgrade also affects the state's debt linked to the GO debt. Total debt affected is $34.4 billion, Fitch said in a statement. Fitch retains a negative outlook on the rating.
The rating action deals another blow to Gov. Chris Christie, whose reputation as a manager was already weakened by a scandal over allegations that his aides and appointees to the Port Authority of New York and New Jersey created a traffic jam at the George Washington Bridge to punish a political opponent. On April 9 Standard & Poor's compounded the problems for Christie, who had been seen as a leading candidate for the Republican presidential nomination, by downgrading the state's GO rating to A-plus.
"This is devastating news that reflects poorly on the governor's fiscal management of this state and his reliance on short-term solutions," Democratic New Jersey Assemblyman Gary Schaer, chairman of the Assembly Budget Committee, said after the Fitch downgrade.
In explaining the action, Fitch senior director Marcy Block said the large size and lateness in the fiscal year of the revenue shortfall was key. Block said the state had narrow financial reserves and was likely to use one-time measures to cover the gap. The state ended fiscal 2013 with a fund balance of $313 million, less than 1% of operating revenues.
Block said that the state has a history of making overly optimistic revenue forecasts in recent years that has led to budget strains. The government has repeatedly relied on one-time solutions to achieve budget balance, she said.
New Jersey has considerable unfunded long-term liabilities in the form of debt and unfunded pensions, Block said. Full funding of the pensions remains several years off. Increasing the funding, as planned, will put pressure on the government's other spending priorities, she said.
While the state has a broad and diverse economy, its recovery has been lagging behind that of the nation, Block said.
On the plus side, the governor has strong powers to implement spending reductions to balance the budget.
Fitch estimates that the governor could end up using one-time revenue measures for nearly $2.2 billion of revenues for the current fiscal year. This would amount to 6.6% of the fiscal year's operating budget.
Block said she was also concerned by apparently overly optimistic estimates of revenues in the governor's proposed fiscal 2015 budget. This continues his administration's pattern of optimistic revenue projections, she said.
The New Jersey Treasury said the chief reason for the $807 million shortfall was the state's underestimation of the impact of the imposition of higher federal taxes at the end of calendar year 2012. Wealthy individuals in New Jersey manipulated their income to advance it to 2012 so as to pay taxes at a lower rate than they would if the income was counted in 2013.
The shift in taxes has affected several states, said Joseph Perone, New Jersey director of communications. The Christie administration "will take any and all actions necessary to offset revenue shortfalls to achieve a balanced budget as constitutionally required," Perone said.
"It's time for the governor to take off the rose-colored glasses, stop bragging about fantasy balanced budgets and produce a realistic and responsible spending plan," said New Jersey Democratic Senator Paul Sarlo, chairman of the New Jersey Senate Budget and Appropriations Committee.
Miller Tabak Asset Management rates New Jersey at A1, equivalent to an A-plus rating. The firm said it "may downgrade New Jersey to the A2 level if the state continues to miss projections or if the state keeps resorting to temporary budget fixes."
Moody's Investors Service rates New Jersey Aa3 with a negative outlook. Moody's released a comment on Wednesday that said the revenue shortfall was a credit negative.
Robert Slavin is a reporter for The Bond Buyer.
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