Even though New Jersey employment shrank in March, for the first time since mid-2011, and state tax collections (mostly income taxes) having fallen short of projections by more than $1 billion (3%) for this fiscal year (through June), the state is still budgeting as if its economy will grow more than 5% this year -- and that wishful thinking "has compounded the budget risk of optimistic revenue assumptions," Moody's analyst Baye Larsen warned in a report to investors this morning.
"New Jersey's options for balancing the budget will be limited" this Spring, Larsen wrote. "Options will include structural cuts to operations, one-time cuts to large year-end expenditures," and "other one-time solutions." In fact, New Jersey has been using one-time solutions for "the past several years," which just "underscores its financial weakness," Larsen added.
The rival Standard & Poor's agency cut New Jersey to A+, lower than any state but California and Illinois, earlier this month. Moody's rates NJ one notch higher than S&P does, at Aa3, but Moody's is also considering a downgrade. The lower the debt rating, the more a borrower typically has to pay to attract investors. Moody's is also threatening to downgrade Pennsylvania, in a state election year, for failing to match taxes to spending.