New Jersey Governor Phil Murphy just got the one reward he has been after since taking office four years ago: a credit-rating upgrade.

On Wednesday, Moody’s Investors Service raised New Jersey’s credit rating, giving the state its first upgrade since 2005, after years of pension underfunding and benefit increases. An upgrade can lead to reduced borrowing costs for states, as bond investors are willing to accept lower yields from issuers considered less likely to default.

The ratings company said the upgrade of the Garden State’s general obligation bonds to A2 from A3 “incorporates the state’s continuing trends of strong revenue and liquidity and its steps to more aggressively address liability burdens, including completion of a debt-reduction program and increased pension contributions, which are consistent with improving governance and fiscal management.” 

The move marked a culmination of years of financial focus by Murphy, 64, a Democrat and retired Goldman Sachs Group Inc. senior director, who took over from two-term Republican Chris Christie, under whom the state received 11 downgrades -- a record for a New Jersey governor -- from the three major ratings companies. Analysts had cited budget gaps, income lost to tax cuts, failures to make required pensions contributions and overly optimistic revenue projections. 

“Our efforts to build New Jersey’s credit rating back up from decades of downgrades have yielded another positive result. This proves that facing our challenges head on -- rather than delaying and deferring – is the best way to get our house in order,” Murphy said in a statement.

Treasurer Elizabeth Maher Muoio said the state’s improved credit rating would decrease the cost of annual borrowing for the state, “saving taxpayers money now and in the future,” she said. “It also provides further evidence that we are taking the right steps on our continuing path toward fiscal security.”

Campaign Promise
Murphy had made restoring New Jersey’s good credit -- a sign of its fiscal stability -- one of his signature campaign promises. But as the state’s economy buckled under the weight of Covid-19 lockdowns, the state’s credit faltered.

New Jersey in April 2020 was downgraded by Fitch, which cited effects of the pandemic and the state’s perennially underfunded pension. S&P Global Ratings followed seven months later, echoing Fitch’s points and adding the stress of Murphy’s borrowing about $4 billion to fill spending gaps. 

As the state’s economy improved, Murphy made the first full pension contribution in 25 years, built a surplus and reduced health-benefits spending.  Fitch and S&P were among four ratings companies that raised the outlook on New Jersey’s debt, signaling an upgrade is more likely.  

New Jersey is among a slew of states that have collected higher-than-expected income taxes since the pandemic hit as higher-income earners worked from home and reaped the rewards of gaining stock prices. That helped erase or largely reduce projected deficits facing U.S. states, which also received a large influx of federal aid. Even Connecticut and Illinois in 2021 got ratings boosts, breaking two-decade dry spells.

But New Jersey remained the U.S. state with the worst credit rating outside of Illinois.

“I know enough having worked at Goldman Sachs for 20-odd years, that with ratings agencies, it’s a journey,” Murphy said in an October interview with Bloomberg News. “They take you down fast, maybe even based on a moment in time or a data point, but they take you up only because you rebuild trust with them over time.” 

To that end, Murphy said he was intent on making pension payments, spending the state’s surplus responsibly and making “reasonable” revenue projections. “My guess is a couple more bats, and we’re consistent in keeping things going in the right direction, it could mean a year or two, which for New Jersey, would be big,” Murphy said in October.

A month later, Murphy became the first New Jersey Democratic governor to win re-election since 1977, by a closer-than-predicted 3 percentage points. In an annual policy speech in January, the governor pledged not to raise taxes and called New Jersey “a beacon of what’s possible,” with high Covid-19 vaccination rates, a growing economy and strides on civil rights, gun violence and reproductive rights.

On March 8, he will present his spending plan for the fiscal year that starts in July.

More than midway through fiscal 2022, total revenue is up $4 billion, or 22% more than than the prior comparable period, with big gains in sales and corporate business tax collections, state treasury reports show. The state also has $3.3 billion in unallocated federal Covid-19 recovery funds, according to Murphy’s office. 

Those funds are “giving New Jersey a chance to make some progress on what has been some real credit concerns,” Doug Offerman, Fitch’s lead analyst for New Jersey, said in an interview.

Challenges Ahead
Challenges remain. Unemployment, at 6.3%, is third-highest among states, behind California and Nevada, and more than 2 percentage points above the U.S. rate. The unfunded public pension liability in 2020 grew 18%, to $133 billion, according to Moody’s. 

Murphy signed a record $46.4 billion budget with a record pension payment of $6.9 billion, marking the first time in 25 years that the state made a full contribution. He faces pressure to maintain those full payments.

“We are looking to see if the governor is staying the course on sort of staying in repair mode for the state’s finances,” Offerman said. “Lots of progress has been made, but there is a long way to go.”

Of the state’s federal pandemic stimulus, $133.5 million has been spent, according to the state Treasurer. The total allocated, though not necessarily spent, is $2.97 billion. Another $3.3 billion remains. Murphy has said the state shouldn’t be so quick to commit or spend that remainder while Covid-19 variants remain a threat.

Republicans, the legislature’s minority party, say the state would be in a better position if it weren’t sitting on so much Covid cash. Last year they proposed a spending plan that includes $2.5 billion to help replenish the unemployment insurance fund, which is insolvent, and repay $560 million in federal advances for jobless claims. Instead, the administration will collect an estimated $1 billion more in business taxes over three years.

“Replenishing the unemployment trust fund should have been the first thing, rather than go with a tax increase on businesses,” said Assemblyman Hal Wirths, a Republican from Hardyston and former state labor commissioner.

High Expectations
In addition to upgrading New Jersey’s general obligation bonds, Moody’s upgraded the state’s related subject-to-appropriation bond ratings also by one notch, to A3 from Baa1 for bonds financing essential-purpose projects and to Baa1 from Baa2 for bonds financing less-essential projects.

“The stable outlook is based on expectations the state will maintain recently improved governance practices and continue to benefit from a more proactive liability management approach,” Moody’s said.

Bondholders have been demanding less additional yield to hold New Jersey’s general obligations as the state works to reduce its debt and boost pension contributions. A general obligation bond maturing in June 2028 traded Wednesday at a yield of 1.86%, or 48 basis points above top-rated municipal debt, according to data compiled by Bloomberg. That’s down from 131 basis points above benchmark munis when New Jersey first sold the debt in November 2020 at a 1.85% yield.

“We’ve seen marked improvement in the state’s credit profile amidst unprecedented challenges,” said Dora Lee, director of research at Belle Haven Investments, which has $15 billion under management with $326 million in state obligations for New Jersey. “We still remain vigilant for the state’s outlook over the coming year.”

--With assistance from Michelle Kaske and Natalia Lenkiewicz.

This article was provided by Bloomberg News.