How to Improve New Jersey's Credit Rating
by Dr. Sean Stein Smith, CPA, DBA, MS, MBA, CMA, CGMA, Lehman College –
October 10, 2017
One of the issues that is of top concern to the business community, small business owners, aspiring entrepreneurs and government employees is the state of New Jersey’s credit rating, which has been downgraded 11 times during the last eight years.
Regardless of which gubernatorial candidate emerges victorious in November, the state’s credit rating, and its implications on business, is and will remain a very serious issue. As of the writing of this article, only Illinois has a lower rating than New Jersey, and one just has to review headlines to see the woes facing that state. Currently, New Jersey has been downgraded to an A3 credit rating by Moody’s, an A- with a negative outlook by S&P, and an A coupled with a stable outlook by Fitch. Examining this issue from an apolitical perspective, there are several core drivers among the many issues facing the state budgeting and spending processes that should be the focus of comprehensive financial review and planning to improve the state’s credit rating.
Improving the Accuracy of Budgeting
An issue that has been cited by numerous credit rating agencies, media stories and public debates is a lack of accuracy and consistency in the budgeting and forecasting process. One example, and something that surely played a role in the downgrades, is the fact that the current fiscal year revenue collections have come up $527 million short of earlier estimates*. As every businessperson knows, a lack of accuracy in the forecasting process will lead to consistently inaccurate decisions and, ultimately, budget revisions. Such revisions are bad enough for a private business, whether in the for-profit or nonprofit sector, but it has even broader implications when such gaps exist in a governmental budget. Improving the forecasting accuracy of operating budgets, revenue and the state of the pension would assist decision makers and ratings agencies in making more accurate decisions. Even if the reality of more accurate forecasts creates some short-term pain and awkward conversations, improving the accuracy of such information will create a better long-term environment for decision making.
Tacking the Pension Liability
Speaking of pension debt, the budget gap — projected by Moody’s to reach $3.6 billion* by fiscal year 2023 when taking into account pension and other economic issues — is a serious issue for the state’s credit rating. Clearly, the chronic underfunding of the pension is an issue that spans administrations and political lines, is virtually always a contentious issue debated around election time, and has medium- to long-term effects on the financial condition of the state. Akin to how chronic debt levels, and not paying off these debt levels over time, will have a detrimental impact on the credit score of an individual and make borrowing additional funds more expense, a similar effect has occurred to the state over time. A step along the critical path toward addressing this issue, in an apolitical manner, is to come to terms with what can be done to address this shortfall. CPAs and other financial professionals can approach this issue from an objective manner, have the capabilities to analyze the situation and can recommend tactics to address this ongoing issue. An issue as complicated as pension funding at the state level involves many stakeholders and is impacted by multiple economic forces beyond the control of any one administration or group, but it is something that must be addressed. Ignoring the state pension issue, or proposing solutions that will not ultimately be workable, is not productive. Such potential acrimony, however, also presents an opportunity for CPAs who are educated and informed on this issue to recommend logical and sustainable solutions.
Tax Policy and Uncertainty
A consistent theme and issue for business owners, individuals and rating analysts alike is the uncertainty related to tax rates, tax policy and the effects that changes in taxes will have on business development, economic growth and the likelihood of individuals remaining in the state. While tax rates and tax policies are a routine, and almost chronic, issue in New Jersey and other states, the increased uncertainty related to federal tax policy has only amplified this existing uncertainty and wariness. Specifically, the proposed elimination of the tax deductibility of income taxes paid by workers is one of a series of tax issues that potentially distort business activity and investment. Uncertainty linked to this issue only compounds uncertainty and existing concerns linked to items such as the estate tax and property taxes. Clarifying these issues, putting together objective financial proposals that address the financial ramifications of potential changes, and documenting said changes represent areas where CPAs can add value to the conversation in an objective and apolitical manner.
The financial condition of the state, including the downgrade of the state’s credit rating, is not a situation that developed overnight, nor will it be solved overnight. Regardless of who emerges victorious in the upcoming election, there are a host of issues waiting for the new administration to address. New Jersey has suffered multiple downgrades over the last administration, but these are simply symptoms of larger issues that continue to negatively affect the creditworthiness and financial future of the state. Inaccuracies in budgets and forecasts, uncertainty with action on the pension issue, and tax policies that might change on both a federal and state level represent both challenges and opportunities for administrators and professionals who live and work in the state. CPAs, in particular, have the skills and mindset to analyze, address and recommend potential solutions to the contentious issues. Working within organizations, external stakeholders and government representatives allows CPAs, both individually and through the NJCPA, help address these complex issues.
Sean D. Stein Smith
Dr. Sean Stein Smith, CPA, DBA, M.S., M.B.A., CMA, CGMA, is an assistant professor at Lehman College. He is a member of the NJCPA Content Advisory Board, Student Programs & Scholarship Committee, Emerging Leaders Council, Nonprofit Interest Group and Accounting & Auditing Standards Interest Group.
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This article appeared in the September/October 2017 issue of New Jersey CPA magazine. Read the full issue.