Fitch Downgrades N.J. Bond Rating Despite Pension Overhaul

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TRENTON, N.J. -- New Jersey's bond rating was downgraded one notch on Wednesday, signaling increased concern to potential investors over the state's growing unfunded pension and health benefits liabilities.

The state's bonds are still considered high grade, but the bump by Fitch Ratings from AA to AA-minus on general obligation bonds, open space preservation bonds and appropriations-backed debt could significantly increase its borrowing costs.

A bond rating for the state is like a credit rating for a person. The Fitch bond rating system uses an alphabetical scale from AAA down to D.

Fitch is the third rating agency this year to downgrade the state's bond rating but the first to do so since the Legislature passed landmark pension and health benefits overhaul legislation.

Moody's cut the state's bond rating one notch in April, citing the slow economic recovery and mounting employee retirement costs. Standard & Poor's cut its rating in February, making New Jersey's credit rating among the lowest of all the states.

Republican Gov. Chris Christie blamed Democrats for the downgrade in February, saying their inability to rein in retiree costs contributed to the state's credit slide.

"The sky started to fall today," he said at the time. "You've already seen what the Legislature's inaction has cost the State of New Jersey."

Democrats responded then that the governor should be held accountable for his actions and should stop blaming everyone else.

Christie's office referred questions to the treasurer's office. Treasury spokesman Andy Pratt did not immediately return messages seeking comment Wednesday.

Christie chief of staff Richard Bagger and chief counsel Jeff Chiesa made the rounds to various New York-based rating agencies in recent weeks, after Christie signed the benefits overhaul package that took effect July 1.

The new law requires significantly higher health care and pension contributions from government workers and is designed to cut into the state's huge unfunded liability for retirees.

The pension system for teachers, public workers, police officers and firefighters and the health insurance funds for retirees are shy of their eventual liabilities by more than $110 billion combined.

Fitch cited increased pressure to pay for growing retiree liabilities as reason for the rating downgrade, especially during a weak economic recovery. It also cited the state's already high debt burden and a persistent structural budget deficit.

New Jersey's $29.7 billion budget was signed June 30. Christie averted a shutdown of state government by paring $900 million from the budget Democrats had handed him and then signing it June 30 -- hours before the new fiscal year began.

While Fitch recognized the recent benefits legislation as a significant cost containment measure, it said the state would be challenged to make increasingly large annual pension payments as the new law is phased in.

New Jersey has skipped or greatly reduced its payments into the pension fund, contributing to the unfunded liability. The new law requires the state to make its payments, which currently total more than $3 billion a year, but is phasing the requirement in over seven years. This year's pension payment, one-seventh of the total, was about $500 million.

Last year, New Jersey's $10.9 billion structural budget gap was closed, in part, by foregoing $3.1 billion in pension contributions, "a source of budge relief the state has repeatedly relied on in recent years," Fitch wrote.