Moody’s boosts N.J.’s credit outlook, citing pension payments and surplus

The ratings agency said continued full pension payments and a strong surplus warrant optimism despite New Jersey's structural deficit. (Illustration by Alex Cochran for New Jersey Monitor)

Ratings firm Moody’s improved New Jersey’s credit outlook on Wednesday but kept ratings static for the state as a whole, praising continued full pension payments but warning that reliance on one-shot revenue items and a drained surplus could lead to credit downgrades.

The firm upgraded the state’s rating outlook to positive, signaling New Jersey is well positioned for a credit upgrade and predicting strong economic and revenue growth that would allow the Garden State to continue making full pension payments in the next fiscal year.

“This outlook upgrade is especially good news given that it comes just a year after the state received a rating boost from every major credit rating agency,” said Treasurer Liz Muoio. “That signals to us that the fiscal decisions we have made — namely to maintain a healthy budget surplus and continue to meet our pension obligations — are the right ones.”

The ratings agency said New Jersey could receive a credit upgrade that would take its rating back to a high grade if it maintained a surplus equal to at least 10% of annual spending, took steps to encourage continued full pension payments, and worked to reduce long-term debts and fixed costs.

New Jersey’s A1 credit rating is at the top of the firm’s upper middle grade tier, which suggests New Jersey’s long-term bonds carry a low credit risk and the state has a superior ability to repay short-term debt.

The change in New Jersey’s outlook coincided with strong revenue growth in July. Treasury officials on Wednesday said New Jersey’s gross income tax collections grew by 9% over last July after excluding an extra week of tax withholdings included in the current year’s counts.

Corporate business tax revenue rose 5.1% year-over-year, while sales tax collections remained largely static, growing just under 1%.

“We remain laser focused in our multi-year efforts to restore the state’s fiscal standing,” Gov. Phil Murphy said in a statement.

In awarding the improved outlook, Moody’s cited economic growth in New Jersey that had outpaced that of other mid-Atlantic states.

The ratings agency noted that, while the state budget approved in late June includes a $2.4 billion structural deficit that is expected to bring New Jersey’s surplus down to roughly $6.2 billion, the state’s reserves still dwarf the razor-thin surpluses it has maintained for much of the past two decades.

That deficit is set to expand in the fiscal year that begins July 1, 2025, when a statutory dedication will direct collections from a 2.5% surtax on businesses with more than $10 million in profit to NJ Transit.

The tax, called the corporate transit fee , is forecast to raise $1 billion for the state’s general fund in the current July-to-June fiscal year and includes six months of retroactive collections applied to the first six months of 2024.

Growth in the state’s major revenue sources — its sales and personal and business income taxes — could help close the state’s burgeoning structural deficit, but it remains to be seen whether they will grow fast enough to bridge the gap.