New Jersey Taxpayers ‘On the Hook’ for Massive Debt: Report

By Gregory Bresiger
Gregory Bresiger
Gregory Bresiger
Freelance Reporter
Gregory Bresiger writes about business and personal finance. He is a former New York Post business reporter.
December 8, 2021 Updated: December 8, 2021

New Jersey has amassed a huge, and possibly dangerous, level of debt, according to a new report that reviews the financial health of state governments across the country.

Each Garden State taxpayer owes tens of thousands of dollars and the state is a tax “sinkhole,” according to the nonprofit organization Truth in Accounting (TIA), because state lawmakers of both parties have overspent and used accounting “gimmicks” for decades. The organization defines “sinkholes” as states that lack the necessary funds to pay their bills.

“New Jersey receives an F in finances,” Bill Bergman, TIA’s director of research, told The Epoch Times.

The state “had $31.7 billion available to pay $216.9 billion worth of bills,” and “the outcome was a $185.2 billion shortfall,” the TIA report said. As a result, taxpayers in the state are “on the hook for $58,300 as of fiscal year 2020.”

New Jersey, the report concludes, “remains in abysmal fiscal health and had no money set aside to weather the current or any future crisis.”

Meanwhile, New Jersey officials claim the state has a balanced budget.

“If this is true,” Bergman said, “then how is it the state has this massive debt problem?”

The offices of New Jersey Gov. Phil Murphy and acting State Comptroller Kevin D. Walsh didn’t respond to requests from The Epoch Times for comment. Assembly Speaker Craig J. Coughlin declined to comment.

A spokesman for the Republican minority in the New Jersey legislature praised the report. To not accept the conclusions of the report “would be crazy,” state Assemblyman Hal Wirths said.

Wirths noted that TIA “points to pension and health benefit costs as New Jersey’s No. 1 financial problem, and they are.”

He says New Jersey has the third-highest bonded debt in the nation—$61.3 billion—and “far more per capita than the two highest states, California and New York.”

Still, three major bond ratings companies say New Jersey’s situation isn’t as dire as the TIA report indicates, although they acknowledge that it’s serious.

New Jersey’s credit rating took a significant hit last year when the ratings firm Standard & Poor’s downgraded the state to BBB+ for the first time. That grade is barely investment grade, S&P director and lead analyst Tiffany Tribbitt told The Epoch Times.

Tribbitt agrees with TIA that New Jersey’s bond rating “is the second-worst of the states.” Illinois is the worst, she said.

Still, she said New Jersey has the resources to overcome the problem.

Fitch and Moody’s Ratings also concur that the state has considerable long-term debt but can manage it.

The TIA report, titled “Financial State of the States, 2021,” makes clear that debt problems aren’t limited to just the Garden State, rating 39 states as “sinkholes.” The report also points to 11 states as what it calls “sunshine” states, meaning their assets are greater than obligations. The top five sunshine states are Alaska, North Dakota, Wyoming, Utah, and South Dakota.

New Jersey taxpayers, however, are almost in the deepest sinkhole. Only Connecticut is worse.

Bergman warns that unless changes are made, a “day of reckoning” is coming for New Jersey and others.

Liability Burdens

TIA says New Jersey isn’t the only state that’s disguising the extent of its debts. This dubious practice includes not accurately stating the amount of promised benefits other than pensions, or other post-employment benefits (OPEBs).

What is happening in New Jersey, Bergman contends, is going on in much of the United States and might require more federal bailouts. States may need more COVID relief payments in order to stay solvent because they are unable to keep their promises to taxpayers and workers, he says.

“In FY 2020, total unfunded pension liabilities among the 50 states were $926.3 billion. For every $1 of promised pension benefits, the 50 states have only set aside 64 cents on average to fund these promises,” according to the TIA report. “Furthermore, in FY 2020, total unfunded OPEB liabilities among the 50 states were $638.7 billion. For every $1 of promised retiree health care benefits, the 50 states have only set aside 8 cents on average to fund these promises.”

Still, S&P officials, while saying they don’t want to debate the TIA report, agree that New Jersey’s debt obligations are considerable and worse than for most states.

“New Jersey,” S&P writes in an April 12 report, “has high retiree health costs, particularly for retired local school district teachers, which the state is responsible for. At fiscal year-end 2020, the state’s share of unfunded net OPEB liabilities totaled $65.5 billion, or $7,370 per capita, a reduction from the previous year following new labor agreements. At fiscal year-end 2019, New Jersey’s unfunded net OPEB liabilities totaled $75.9 billion, or $8,548 per capita, compared to an average of $1,971 in our most recent 50-state study.”

S&P officials note that New Jersey is beginning to pay down its debts. That’s in part because its investments have recently done very well. Still, some of its actuarial assumption practices are suspect, critics say. State officials are assuming a 7 percent rate of return on investments when the assumed rate should be 6 percent, S&P officials say.

Wirths believes state officials continue to use bad accounting practices.

“New Jersey gets away with too many gimmicks and relies too heavily on one-shot revenue, which is nearly $5 billion this year,” Wirths said. “Democrats used $4.15 billion from last year’s unexpected surplus, plus $800 million from non-recurring sources to balance the budget. That can’t be sustained.”

The S&P report also gives New Jersey a low grade on debt practices.

“On our scale of ‘1.0’ to ‘4.0’, where ‘1.0’ is the strongest score and ‘4.0’ the weakest, we have assigned a composite score of ‘3.7’ to New Jersey’s debt and liability profile,” according to S&P.

Moody’s, in its July 14 report, gave New Jersey an A3 rating on its general obligation (GO) bonds, a low rating. But it praised recent efforts by  Murphy to solve the problems of long-term debt.

“The state has responded to a brightening revenue and liquidity picture with several actions reflecting a recent commitment to addressing more aggressively its liability burdens, demonstrating improved fiscal governance and management. These actions include debt reduction and avoidance and acceleration of pension contributions,” the report reads.

Moody’s changed its outlook from “stable to positive.” That means the state’s bond rating might be upgraded in the next one to three years. If upgraded, it would mean the interest rates on New Jersey bonds could be reduced, saving taxpayers tens of millions of dollars on the cost of borrowing. If the reverse happens, taxpayers must pay more. That’s the danger of anyone or any institution that uses a lot of borrowed money.

Still, the conclusion by Moody’s is mixed, acknowledging long-term debt problems and poor past practices but saying that they can be solved.

“The rating,” according to the report, “reflects the state’s large, diverse, and wealthy economy offset by large, growing long-term liabilities and the burden of very large pension contributions, which are the result of substantial historic pension underfunding.”

New Jersey, Moody’s says, remains “vulnerable to budget risks in a period of continued uncertainty and may challenge the state’s ability to sustain its improving trajectory.”

Fitch Ratings, in its April 13 report, gives New Jersey an A- grade. It said its rating reflects New Jersey’s “adequate financial resilience.” But it also said that its condition isn’t as good as that of most states, and stirs up some troublesome ghosts.

New Jersey’s weaker position, Fitch said, “is the legacy of decades of structural budget mismatches and escalating liabilities that had only partly been addressed by the time the coronavirus pandemic unfolded with the state as an initial epicenter.”

Fitch continued, “Better-than-expected revenue performance has offset some of Fitch’s initial credit concerns, but risks remain, even with significant one-time federal aid coming from the March 2021 American Rescue Plan Act (ARPA).”

According to bond ratings firms, a triple BBB or A- rating means the state or city has adequate capability of meeting its financial commitment today. However, critics like Bergman say that in difficult economies—say, a bear market period in which investments lost instead of made money—states with these ratings and considerable long-term debt could be in trouble. They might have to raise taxes or cut programs to pay their bills.

Still, none of the ratings companies are as critical of New Jersey’s practices as TIA.

Why the Disparity?

Bergman said that ratings companies are compromised by relationships with states and cities. So they cannot, he added, effectively evaluate fiscal conditions, their ability to pay bills, or even properly add up the debts, much of which are financed through bonds.

“We don’t work for bondholders like the credit rating agencies,” Bergman said. He previously worked as an economist and policy analyst at the Federal Reserve in Chicago.

The credit ratings firms, he said, are part of a system that “puts money into the machine that forestalls the day of reckoning that is getting closer.”

“It can take several forms, including a federal bailout, which we are in the middle of. Thirty-nine of the 50 states are sinkholes,” he said.

However, S&P Global Senior Director David Hitchcock, with 41 years in the ratings business, said no one had ever pressured him to give a better rating so bonds could be sold.

According to Bergman, the issue in these 41 states is how assets and liabilities are counted. This includes the debate over accrual versus cash basis accounting. He warned that badly run states often use cash basis accounting.

But S&P’s Hitchcock said “many accounting experts” would disagree with TIA’s standards. He said states are using a form of accrual standards as well as generally accepted accounting principles.

CPA experts said the difference between accrual and cash basis accounting is in when and how revenue and expenses are counted. The cash method is a more immediate recognition of revenue and expenses while the accrual method focuses on anticipated revenue and expenses.

What should citizens in “sinkhole” states do?

They should insist that governments improve the listing of assets and liabilities, TIA said.

“We believe,” Bergman said, “in accrual spending and accrual revenue, and that states should not be run on a cash basis. The problem is many states count borrowed money, which is not what you do in the private sector.”

Bergman said that cash basis accounting is tantamount to a husband telling a wife that he has eliminated all their debts.

“But the way he did it,” Bergman said, “was by putting all the debt on a new credit card.”

Gregory Bresiger
Freelance Reporter
Gregory Bresiger writes about business and personal finance. He is a former New York Post business reporter.