S&P Global Ratings has cut its credit grade for New Jersey's general-obligation bonds a notch, to A-.
The agency also warned it may cut again soon, if the state doesn't do a better job matching its spending, including teacher and police pensions, to its income, including sales and income taxes. New Jersey is spending, or promising to spend, $113 for every $100 the state collects in taxes, according to S&P.
The higher the credit rating, the less a borrower usually has to pay to get investors to buy its debt. New Jersey's low credit rating costs around 1 percentage point more than high-credit states like Maryland or Delaware, costing taxpayers $10 million a year on every $1 billion in new bonds issued.
Only Illinois, at BBB, has a lower S&P state rating than New Jersey. Pennsylvania ranks fourth-lowest, at AA-, with a "negative outlook." All three states pay public-sector retirees relatively generous pensions but haven't set aside tens of billions of dollars needed to keep the checks coming, S&P says.
S&P also cut ratings for other New Jersey state issuers, including for $1.3 billion in New Jersey Economic Development Authority school construction bonds, which it downgraded a notch to BBB+, with a continued "negative outlook."
"State budget pressures will intensify in future years," noted S&P Global Ratings credit analyst David Hitchcock, in a statement explaining the rating cut.
Putting aside New Jersey's large pension expenses and the risk the economy could slow and tax collections fall, New Jersey's "revenue growth has not kept pace with rising costs," according to analyst Hitchcock.
State spending on public schools and colleges, Medicaid, bond interest and medical benefits to retired state workers have also "imbalanced" the budget, according to Hitchcock. New Jersey has "limited reserves" to pay its bills in case the economy slows further, he added.
New Jersey needs "credible pension reform," or a lot more pension funding -- so much it would make it hard to keep funding other programs, Hitchcock concluded.
S&P state credit ratings, as of last week:
New Hampshire AA/Stable
New Jersey A-/Negative
New Mexico AA/Negative
New York AA+/Stable
North Carolina AAA/Stable
North Dakota AA+/Stable
Rhode Island AA/Stable
South Carolina AA+/Stable
South Dakota AAA/Stable
West Virginia AA-/Stable
STATE TO FROM DATE
New Mexico AA/Negative AA+/Negative Nov. 10, 2016
Alaska AA+/Negative AA+/Watch Neg Oct. 27, 2016
Alaska AA+/Watch Neg AA+/Negative Oct. 7, 2016
Illinois BBB/Negative BBB+/Negative Sept. 30, 2016