Whether it was political scandals like ‘Bridgegate’ under Gov. Chris Christie or the near financial insolvency of Atlantic City due to sharp decline in revenues, New Jersey has had its fair share of financial and political turmoil in recent years.
The newly elected Democratic 56th Governor of New Jersey, Phil Murphy, has had a long career with Goldman Sachs before bringing himself into government and eventually running for governor. During his campaign, Mr. Murphy had made some great promises to the citizens of New Jersey to fix the balance sheet and take the financial strain off with newly revived revenues by introducing new income tax measures for the wealthiest. Retrospectively, under the previous administration of Chris Christie, the state faced over ten credit downgrades, and pension costs have been at higher than normal levels. It is projected that in the next five years the state’s pension liabilities will almost double.
In this article, we will take a closer look at the state of New Jersey’s financial picture and whether Phil Murphy’s guidance and policies will help create a brighter financial outlook for the state.
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The State’s Financial Challenges and Gov. Murphy’s Combat Plan
For many local and state governments throughout the U.S., the underperformance of their pension investment portfolios has significantly increased their pension liabilities, and New Jersey is not the exception. The state has had a history of underfunding its pension obligations for the past few decades, which has led to a continuous increase in the state’s contribution toward its pension liabilities; the rise in the state’s liabilities is happening quite fast. As mentioned earlier, the state’s annual pension contributions are likely to double in the next 5 years.
In addition to the pension troubles, Gov. Phil Murphy has also inherited the state’s aging and deteriorating infrastructure, low economic growth, low pace of employment growth and high property taxes of New Jersey compared to the rest of the U.S. To counter this, Gov. Murphy and his diverse team have proposed some strategic tactics as mentioned below.
- Ensure the wealthiest pay their fair share of tax and, potentially, introduce a ‘millionaire’s tax.’
- Legalize recreational marijuana.
- Increase public-school funding and provide free access to community colleges in the state.
- Support for gay rights and climate change, while opposing healthcare cuts and building a diverse Cabinet team.
However, given the federal government’s new tax plan and U.S. Attorney General Jeff Sessions’ crackdown on marijuana, implementing the first two tactics may be challenging.
Making matters even more challenging is New Jersey’s poor economic performance relative to the rest of the country. Whereas national unemployment is currently hovering at more than 17-year lows, New Jersey’s jobless rate recently spiked to 5%. That’s nearly one percentage point higher than the national average. The state’s GDP growth has also trailed the national average in recent years, with annual growth failing to cross the 2% through 2016. Between 2006 and 2016, New Jersey’s GDP growth has trailed the national average by nearly 1 percentage point on a compound annual growth (CAGR) basis.
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Stockton’s Bankruptcy: A Comparison
New Jersey’s ongoing financial woes mirror the events that eventually led to the bankruptcy of Stockton, California, in 2015. Like Stockton, New Jersey has unachievable high pension obligations, which could have major consequences for public sector workers. New Jersey is also in the midst of an economic downturn, making it more difficult to raise revenues. And like Stockton, New Jersey’s credit rating has been cut by the three major credit rating agencies – S&P, Moody’s and Fitch.
Interestingly, both cities also draw eerie similarities to Detroit, Michigan, which filed the largest municipal bankruptcy in U.S. history in 2013.
In addition to the above, New Jersey’s municipal bonds offer poor incentive for yield-seeking investors. For example, bonds maturing in 2028 have an average yield of 1.566%, which is well below the 2.85% offered by the benchmark 10-year U.S. Treasury note.
On balance, the yields being offered in New Jersey may not be worth the risk for investors in search of stability and long-term growth.
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The Bottom Line
Gov. Phil Murphy’s proposals and campaign promises will soon be put to the test and examined to see their caliber at fixing the financial and political problems of New Jersey. Gov. Murphy has already made some great strides to showcase his commitment to building one of the most diverse Cabinet teams and promoting visibility for racial, ethnic and religious minorities in the state.
Although promising, these measures do not make New Jersey an attractive investment opportunity in the short run. This is unlikely to change without meaningful economic progress or improvements to the city’s balance sheet.
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