New Jersey’s “Unsolvable” Debt Problems Just Got Worse

New Jersey’s “Unsolvable” Debt Problems Just Got Worse
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Less than one year ago, JPMorgan went down the rabbit hole on New Jersey’s debt. Calling the problem “not mathematically solvable,” the terrible issue that has been kicked from one generation to the next took center stage. Now in the face of Trump Administration tax reform that meaningfully hurts the Garden State and other regions with wealthy residents, the outlook is troubling.

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The top 1% in New Jersey pay one-third of all state income tax

On January 12, when New Jersey announced a nearly 12% jump in the year to date gross income tax collections, it might have caused optimists to cheer. Less than one year after hedge fund billionaire David Tepper, estimated to be worth $11.4 billion, moved from New Jersey Moody’s remains concerned.

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When he left New Jersey for the income tax-free state of Florida, the state budget was left with a gaping $140 million hole that resulted in a 1% budget forecasting error.

“A credit-negative revenue gap remains,” they noted in a January 22 report. Revenue will struggle to catch up over the next six months.” A sales tax cut that took effect January 1 is reducing the state’s intake and that jump in tax revenue was largely due to a seasonal December surge, not a more sustainable trend.

In New Jersey, with a population of nearly 9 million, it is 100 households that makeup 5.5% of the revenue base, according to the state’s auditor. Personal income tax, which is topping out at 8.97% in Tepper’s bracket, accounts for 40% of state revenue. The top 1% of the state pay about one-third of all state income taxes.

With additional pension obligations, balancing a budget will be difficult without revenue enhancement

Currently, New Jersey is in a box.

With nearly $900 million in additional pension obligations staring down a budget with sagging revenue, recent trends are not helping the state. “Last year’s federal tax reform will reduce the state’s ability to raise revenue to pay for growing budget challenges,” Moody’s observed, pointing to revenue remaining 0.5% below the budgeted target when the lottery and constitutionally restricted gas taxes are considered.

While tax cuts popular with voters, the lack of budget discipline could force lawmakers to make somewhat unpopular choices where the little option to kick the can down the road exists. Lawmakers in the state are looking to reform the system, but they face challenges.

“New Jersey can’t afford to keep losing taxpayers and businesses,” New Jersey Assembly Republican Leader Jon Bramnick told the Associated Press.

It isn’t just one person leaving that is concerning political leaders. From 1992 to 2014, the state lost $24.91 billion in net adjusted gross income, a Forbes article noted, with 60% of that loss transforming into Florida’s gain.

The Moody’s assessment isn’t pretty:

The state’s capacity to raise revenue to offset these shortfalls has diminished with the recent federal tax reform. The state legislature has previously considered raising the income tax rate on the highest earners, but this option may be less appealing now because the $10,000 cap on state and local taxes deducted from federally taxable income makes such a move more costly to taxpayers. Also, Moody’s Analytics estimates that New Jersey home values are likely to decline 7.5% on average as a result of the federal tax reform, exceeding its estimated 3.6% for New York (Aa1 stable) and 5.6% for Connecticut (A1 stable), leaving many New Jersey taxpayers with less disposable income and wealth. Although business activity may increase with lower federal corporate tax rates, the negative effect on individuals may hamper consumer spending and sales tax growth.

With new pension contributions increasingly clawing at revenue, Moody’s has its eye on a key performance driver. “The state’s ability to increase its pension contributions on the schedule is critical to reversing its pension cash flow deficit and maintaining stable credit quality.”

If the state can’t support its pension obligations, that means that its debt is likely in a precarious position, too.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)

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