FEBRUARY 9, 2011, 1:58 P.M. ET.

New Jersey Is Downgraded by S&P


By JEANNETTE NEUMANN And LISA FLEISHER

Credit-rating firm Standard & Poor's on Wednesday downgraded New Jersey one notch, citing the state's poorly funded pension system and "above-average" debt levels.

S&P downgraded New Jersey from "AA" with a stable outlook to "AA-," also with a stable outlook. The rater also cited health care and other retirement benefits for government workers as budget stresses. A lower credit rating can mean higher borrowing costs for a state.

The downgrade comes as states are heading into what many observers believe will be the toughest budget session since the recession, as tax revenues remain sluggish and federal aid is cut. Many governors and lawmakers across the country have targeted pension and health-care benefits as cost-cutting priorities.

State and local finances have also become more of a focus for Congress. On Wednesday, representatives gathered for what is likely to be the first of a series of hearings on the topic. The hearing discussed possible solutions to pension underfunding, among other things.

Gov. Chris Christie, speaking about the S&P downgrade at a town-hall style meeting here Wednesday, blamed the downgrade on the state legislature's inaction on his proposed pension and benefit cuts.

"For five months, the Legislature has dallied," he said. Saying Democratic lawmakers have called him "Chicken Little," he said: "Well, the sky started to fall in today, because now when we need to borrow money to keep government going, to do long-term capital projects, it's now going to cost us more to borrow because we've been downgraded, because they in the Legislature have acted for the special interests and not for the public interests."

In September, Mr. Christie proposed broad-based cuts to future pension benefits for currently employed public workers, including reversing a 9% increase granted in 2001. He also proposed switching to a health-care plan where workers paid a percentage of premiums rather than a percentage of salary. Some Democrats have argued the health-care switch would disproportionately hurt lower-paid workers.

For more than a decade, New Jersey has underfunded its pension, partially paying or entirely skipping the annual pension bills for many years in favor of other budget items. Mr. Christie continued the practice in his first budget, skipping a $3.1 billion payment.

Mr. Christie has proposed increasing the amount some public workers pay into the pension system to 8.5% of their salary, the same amount police and firefighters currently pay. State workers, teachers and others pay 5.5% of their salaries, and many judges pay 3.5% of their salaries into their pension system.

Unions have said the state hasn't been paying its share while workers continued to contribute.

New Jersey's pension systems have 62% of what the state has promised to pay in workers' retirement benefits. The state, like many others, hasn't put anything aside for health-care benefits.

Assembly Majority Leader Joe Cryan, a Democrat, in a statement said the governor needs to look at his own choices.

"The Assembly is not about to be lectured by a governor whose budget policies have led to massive property tax hikes and a ballooning pension deficit," he said. "It's time for this governor to be held accountable for his actions and stop blaming everyone else."

New Jersey's pension liabilities have been in the spotlight in recent months. In August, the Securities and Exchange Commission accused the state of misleading investors about the health of its two largest pensions while selling billions of dollars in bonds from 2001 to 2007. New Jersey authorities settled the case without admitting or denying wrongdoing.

That case was the first securities-fraud case against a state and is part of the SEC's move to broadly step up scrutiny of the $2.9 trillion municipal bond market.

Thirty-eight percent of states are rated "AA" by Standard & Poor's, according to a January report by the firm, while about 8% are rated "AA-" like New Jersey, according to the report. "AAA" is the highest rating.

California and Illinois are the lowest-rated states by Standard & Poor's. California carries an "A-" with a negative outlook, while Illinois carries an "A+" with a negative outlook.

New Jersey is rated "AA2" with a negative outlook by Moody's Investors Service, a unit of Moody's Corp., and "AA" with a stable outlook by Fimalac SA's Fitch Ratings. Standard & Poor's is a unit of McGraw-Hill Cos.

http://online.wsj.com/article/SB1000142 ... 52842.html