The good news: all three bond-rating agencies upgraded their ratings for New Jersey’s bonds for the second time in the last year.  The upgrades are good news in that they reflect an improved fiscal condition, largely due to efforts to address New Jersey’s substantial long-term debt burden.  The Murphy administration is taking victory laps, but a closer look reveals that many challenges remain.

The not-so-good news: Gov. Murphy benefited from some large revenue windfalls: billions in federal pandemic aid and record tax collections deriving from a booming stock market and all the federal money flowing through the broader economy.  It’s a lot easier to reduce debt when you have billions in additional revenues to play with.

As the table below shows, thanks to the revenue windfalls, Murphy was able to increase the state spending by 37.6% — from the last pre-pandemic budget (FY2020) of $38.6 billion to his current proposed FY2024 budget of $53.1 billion.  That’s an enormous — and likely unsustainable — increase in spending.

But what happens when the federal money goes away and/or a recession hits?  Rating agencies can both raise and lower ratings, and they all noted that New Jersey still has high debt levels and remains vulnerable to an economic slow-down.  Indeed, even with the upgrades, New Jersey still has the second-worst ratings of all the states.

Not-so-good news: New Jersey’s debt improvement has some important caveats.  As shown in the table* below:

• While total debt decreased by $35.4 billion from FY2021 to FY2022, total debt actually increased by $7.7 billion from pre-COVID FY2020 to FY2022.
• From FY2020 to FY2022, bonded debt was essentially unchanged because Murphy borrowed as much as he paid down.
• Non-bonded debt increased $40.5 billion form FY2020 to FY2021 because of a large increase in unfunded retiree healthcare liabilities due to factors that will likely remain into the future.  Non-bonded debt decreased $35.4 billion from FY2021 to FY2022 because of changes in the calculation of unfunded pension liabilities, which were based on the assumption that New Jersey will make the full required pension payments of $6.5 – 7.3 billion every year until 2047.*
• If New Jersey cannot devote such a substantial part of its (inflated) budget to pensions, the assumptions about the unfunded pension liabilities will change and the non-bonded debt decrease will disappear.

And remember that even with the improvement, New Jersey’s $212 billion of long-term debt is still 4x its annual budget.  Times are good right now, which the ratings upgrades reflect, but Murphy has done little to put New Jersey on a more sustainable path when it comes to spending and the factors driving New Jersey’s debt burden. These challenges will remain when the revenue windfalls go away.

*FY2020 and FY2021 data from State Debt Report for FY2021; FY2022 data from NJSpotlight News.  Pension data from NJ municipal bond preliminary statement.