New Governor Looks To Plug Holes New Jersey As Pension Obligations Explode

Updated on

Governor Phil Murphy promotes his campaign promises which look to new policies to stem the collapsing New Jersey pension system.

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Check out our H2 hedge fund letters here.

To make this a reality, Murphy began his first term, which started in January, with a new vision for state spending plan. The plan, presented Tuesday, will include a millionaire’s tax to help generate $1.3 billion for New Jersey’s underfunded schools, transportation, and pension systems. Nevertheless, the initiative faces a hurdle as it lacks support from Senate President Stephen Sweeney, who claimed that the spending bill unfairly penalizes residents who are suffering enough due to President Donald Trump’s U.S Tax changes that limit deductions for individuals’ state and local taxes.

Even if passed, the millionaire tax plan wouldn’t put a dent in the $8.7 billion structural deficient the state faces. This deficit has been growing due to a decade-long failure to provide adequate pension contributions which have left New Jersey with the worst state pension in the nation.

“The headline issue for New Jersey is pensions and how they’re going to fund them and if they’re going to fund them,” said Daniel Solender, head of municipal investments at Lord Abbett & Co., which manages $20 billion of state and local debt.

Murphy’s treasurer performed a recent feeble attempt to address New Jersey's crippling deficit. On March 1st, the state who raised the assumed pension rate of return to a temporary 7.5 percent. This feat won praise from local governments that had faced hundreds of millions of dollars in added payments when Christie lowered the assumed rate to 7 percent last year. The effect is negligible and does nothing toward fixing the long-term solvency issues of the New Jersey pension system, according to a March 5 commentary by S&P Global Ratings.

During Christie’s two terms New Jersey’s credit rating was downgraded a total of 11 times by three major rating agencies- A record for a State with only Illinois having a worse credit rating.

Murphy’s transition advisory team said in a Jan. 1 report that “The state’s massive pension obligation is a major reason for these downgrades, but insufficient revenues, other debts, and increasing costs are fueling further economic instability,”

Because of these downgrades, high debt levels, and unfunded pension liabilities, investors will require higher yields on New Jersey debt before they even think about investing. New Jersey general obligations maturing in 2033 traded on March 9 at a yield of 3.4 percent. This is 60 basis points more than top-rated municipals due in 15 years, according to data compiled by Bloomberg.

“The state has some well-known credit challenges, mostly related to their pension issues,” said Terrance Hults, a portfolio manager at AllianceBernstein, which manages $40 billion of municipal debt. “We’re negative on the state’s credit long-term, and obviously there’s a high degree of economic activity in New Jersey relative to some other very troubled parts of the muni market you might point to -- it’s not Puerto Rico. But they do have a significantly underfunded pension at this point.”

Murphy, 60, is a former senior director and U.S ambassador to Germany, received his governorship based on promises to strengthen the New Jersey economy. The challenges he faces are a dangerously underfunded pension and unfunded pension liabilities soaring at $183 billion in 2017 as well as $36 billion debt load that consumers 11 percent of the State’s revenues. The state pension is only 36% funded.

Murphy also faces potential gridlock in the legislative section of the government. “There’s still some uncertainty regarding the potential political gridlock and coming up with fiscal solutions to deal with the issues that they’re facing right now,” said Andy Shin, senior research analyst at BNY Mellon Asset Management North America. Some point to hopeful signs of a breakthrough because of a Democratic-led legislature. “Both of those branches are now controlled by the same party, but they still face the issues that were there before the election,” Brennan said. “They need to come up with new sources of revenue and find ways to cut expenses or benefits that have to be paid.” according to Paul Brennan of Nuveen Asset Management, which oversees $140 billion of municipals, including three dedicated New Jersey funds.

Leave a Comment