Commentary

S&P Downgrades NJ’s Debt Rating, Cites Pensions

Bloomberg reports that yesterday Standard & Poor (S&P) downgraded New Jersey’s municipal bond rating from AA to AA-, citing the Garden State’s pension and healthcare liabilities as the chief concerns.

S&P Credit Analyst Jeffrey Panger said in the report:

“The lower rating reflects our concern regarding the stresses from the state’s poorly funded pension system, substantial post-employment benefit obligations, and above-average debt levels.”

According to CNN, New Jersey currently has $33 billion in municipal debt, unfunded pension liabilities totaling over $54 billion, and is staring at a $10.5 billion budget deficit in FY 2012.

However, New Jersey is not the only state to struggle with pension liabilities and budget deficits. California and Illinois are the only other states with lower bond ratings than New Jersey, and both have significant pension concerns. Further, U.S. states and local governments face a combined $3.6 trillion gap between pension assets and liabilities.

Public officials face the daunting task of reforming public pensions, paying off existing municipal bond debt, borrowing increasingly costly municipal bonds and maintaining existing levels of public service delivery.

Unfortunately there is no silver bullet solution to this confluence of issues. Policymakers need to be innovative and consider a wide range of policy options including (but not limited to) privatizing services, divesting public assets, pursuing public-private partnerships, streamlining government, reducing burdensome regulation and finding common ground with public employees to reform public pensions.

Public pension reform is admittedly complex. For useful analysis of the topic, see my colleague Adam Summers’s recent study on reforming public pensions in California.

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