Garden State vs. Golden State

At the end of the financial crisis that began in 2008, New Jersey and California were both grabbing headlines for monstrous budget woes. Today, one state has reformed its ways (sort of) while the other keeps trying to fix problems with the same old broken tools.

A week ago, on May 2, New Jersey’s credit rating was downgraded to A+ due to the state’s $807 million shortfall for 2014 and Gov. Chris Christie’s use of one-time fixes to plug budget holes. This week, the state treasurer essentially told lawmakers that the six weeks left in the 2014 fiscal year wasn’t enough time to close a gap so big. That means officials will add this year’s shortfall to next year’s – pushing the projected 2015 shortfall past $1 billion. Christie has proposed record spending of $34.4 billion for the fiscal year that starts July 1.

Christie now says he is considering a tax on e-cigarettes. But that is only projected to bring in about $34 million in revenue. (On a related note, ratings agencies have scolded the state for revenue projections for 2014 that were “too optimistic.”)

Meanwhile California, which ended a decade of budget deficits in 2013, is touting its continued success. State Controller John Chiang released an April report announcing that the Golden State’s year-to-date revenues exceed expectations by $2.17 billion, or 2.8 percent. Chiang cited an improving economy and voter-approved income tax increases for the healthier budget. But before anyone starts applauding, California – like New Jersey – has been ignoring some of its long term liabilities by not making full contributions to its pension fund. As such, Chiang issued this warning to lawmakers and voters: “This good news will feed the temptation to spend, but that should be tempered by two absolute certainties: boom revenue cycles are always followed by times of exasperation; and years of accumulated debt and unfunded liabilities must be effectively managed if California hopes for long-term prosperity."

Retirees vs. bondholders

Moody’s Investors Service takes a look this week at the ongoing saga of who gets the bigger shaft in municipal bankruptcies: bondholders or pensioners. The verdict? Not surprisingly (and indicative of the unique situations each municipality brings to Chapter 9 cases), the results are mixed. Vallejo, Calif. left pensions alone while making creditors swallow a 40 percent investment loss. The city did restructure its compensation plans and made significant cuts to retiree health care benefits. But post-bankruptcy, Moody’s notes, “Vallejo continues to struggle with escalating pension burdens along with budget deficits and low reserves.”

Central Falls, R.I. took the other route – it made retirees take up to a 55 percent cut in benefits but left bondholders alone. Post-bankruptcy, Central Falls is steadily recovering. “Although it remains challenged by years of deferred capital expenditures, [it] has achieved structural balance,” Moody’s says.

Back in California, Stockton and San Bernardino bankruptcies are still developing. Stockton is unlikely to cut pensions while San Bernardino’s plan is unclear. Detroit, Moody’s notes, is looking to take what the agency calls a “middle ground” approach, with negotiated cuts to pensioners and bondholders. However the city is also trying to void its obligation to pay debt certificates it issued in 2006 to shore up its pensions’ unfunded liabilities.

OK vs. Not OK

Oklahoma’s treasurer is warning that its neighbor Kansas’ one-notch credit rating downgrade last week should be a wakeup call for the Sooner State. A big reason for the downgrade by Moody’s was that Kansas was using one-time revenues to cover operating expenses, a practice that ratings agencies say is unsustainable. In Oklahoma, State Treasurer Ken Miller, noted, there are discussions about using the state’s rainy day fund to help balance the state’s budget.

In the May 1 downgrade to Aa2, Moody’s also said Kansas’ revenue reductions from tax cuts have not been offset by recurring spending cuts and that the state was underfunding its retirement system. It’s the first time in more than a dozen years the state has been rated below Aa1.