New Jersey has huge, possibly dangerous, levels of debt, a new report says, but most state officials won’t discuss it.

The New Jersey taxpayer owes tens of thousands of dollars and is in a tax “sinkhole,” but so are many other Americans, the report charges.

That is because New Jersey leaders of both parties have overspent and used accounting “gimmicks” for decades, the report’s author says.

“New Jersey, receives an F in finances,” Truth in Accounting (TIA) Director of Research Bill Bergman told the Epoch Times. And because of bad policies, each Garden State taxpayer now owes tens of thousands of dollars of debts, TIA said.

Garden Staters Deep in the Hole

New Jersey, the report reads, recently “had $31.7 billion available to pay $216.9 billion worth of bills. The outcome was a $185.2 billion shortfall, which breaks down to a burden of $58,300 per taxpayer.”

New Jersey officials, Bergman warns, say the state has a balanced budget. “If this is true,” he asks, “then how is it the state has this massive debt problem?”

Spokespeople for New Jersey Governor Phil Murphy and acting State Comptroller Kevin D. Walsh wouldn’t answer questions when I was doing this story for the Epoch Times. A spokeswoman for the speaker of the New Jersey legislature, Craig J. Coughlin, also declined comment.

Republicans: We’re not Nuts

However, a spokesman for the Republican minority in the New Jersey legislature praised the report. To not accept its conclusions “would be crazy,” says state Assemblyman Hal Wirths (R-Sussex).

Wirths notes TIA “points to pension and health benefit costs as New Jersey’s number one financial problem and they are.”

Wirths 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 rating agencies said New Jersey’s situation isn’t as bad as the TIA report but is serious.

An S&P official notes New Jersey bonds are BBB+. This, notes S&P director, lead analyst Tiffany Tribbitt, is barley investment grade.

Tribbitt, in an interview with the Epoch Times, agreed with TIA that “New Jersey is the second worst of the states.” Illinois is the worst, she says.

One step below New Jersey’s bond rating, she adds, and the state’s bond would no longer be investment grade. Still, she said the state has resources to overcome the problem.

Other Raters: New Jersey not So Good

Moody’s and Fitch Ratings concur the state has considerable long-term debt but has the capacity to manage it.

Nevertheless, these state debt problems, TIA says, aren’t just in the Garden State.

The report, entitled “Financial State of the States, 2021,” rates 39 states as “sinkholes.” That means debts are bigger than state assets, TIA says.

Sometimes, the report says, states delay reports, pushing debts back to make them seem smaller. It also says eleven states are sunshine states. The latter are states with surpluses. Assets are greater than obligations, TIA wrote. (See sidebar: “The Top Five Sunshine States”).

New Jersey taxpayers, the TIA report adds, are in the deepest sinkhole in the United States. Only Connecticut ranking at 50th, is worst, TIA said.

However, Bergman warns that unless changes are made, the “day of reckoning” is coming for New Jersey and others. Tribbitt and other S&P officials will not debate the TIA report, saying others may interpret the data differently.

New Jersey Is not Alone

TIA says New Jersey isn’t the only state that is disguising the extent of debts, including the amount of promised benefits other than pensions (OPEBs). These are post-employment programs such as health care benefits.

New Jersey, Bergman contends, is part of a flawed fiscal state system in which states distort the true amounts of pensions and other benefits. This, the report says, is going on throughout the United States.

“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.”

Tribbitt and other S&P officials agree Garden State debt obligations are considerable and worse than in most states.

“New Jersey,” S&P writes its April 12 report on New Jersey, “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 New Jersey is beginning to pay down debts. This is in part because its investments have recently done very well. Still, here some of their actuarial assumptions practices are debated. They assume a seven percent rate of return on investments when the assumed rate should be six percent, S&P officials say.

Lots of Gimmicks

State Assemblyman Wirths believes New Jersey officials are continuing to make the same mistakes.

“New Jersey gets away with too many gimmicks and relies too heavily on one-shot revenue, which is nearly $5 billion this year,” Wirths says. “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 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 the April S&P report.

Moody’s in its July 14 report, gave New Jersey an A3(?) rating on its general obligation (GO) bonds. It praised recent efforts by Governor 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.” It changed its outlook from “stable to positive.” That means the rating agency might upgrade the state’s bond rating in the next one to three years. If upgraded, it would mean the interest rates on New Jersey bonds could be decreased, saving taxpayers tens of millions of dollars in the cost of borrowing. If the reverse happens, taxpayers must pay more. This is the danger of all borrowed money.

Still, Moody’s is a mixed rating that acknowledges long-term debt problems but says 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.”

Jersey in Trouble?

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 13th report, gives New Jersey a little better grade, A-. It said its rating reflects New Jersey’s “adequate financial resilience.” But it said that is not as good as most states.

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 rating agencies, a triple BBB or A- rating means the state or city has adequate capability to meet its financial commitment. However, in difficult economies, say a bear market period in which investments lost instead of made money, critics like Bergman say those states with these ratings could in trouble. They might have to raise taxes or cut programs to pay their bills.

Still, none of the rating agencies are as critical of New Jersey’s practices as TIA.

Why the Disparity between TIA and the Raters?

Bergman contends rating agencies are compromised by relationships with states and cities. So they cannot, he adds, effectively evaluate fiscal conditions; their ability to pay bills or even properly tot up debts, much of which are financed through bonds.

“We don’t work for bondholders like the credit rating agencies,” Bergman says. He is a former economist and policy analyst at the Federal Reserve in Chicago.

The credit rating agencies, he adds, 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.”

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

Controversy about the Critical Numbers

Bergman adds the issue in sinkhole states is over how assets and liabilities are counted. This includes the debate over accrual vs cash basis accounting. He warns badly run states often use cash basis accounting.

But S&P’s Hitchcock says “many accounting experts” would disagree with TIA’s standards.

He says states are using a form of accrual standards as well as GAAP, which are generally accepted accounting standards.

How Do You Count Assets and Liabilities?

CPA experts say 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 the “sinkhole” states do?

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

“We believe,” Bergman says, “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.”

Misleading Your Significant Other?

Bergman complains 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 says, “was by putting all the debt on a new credit card.”


The Top Five Sunshine States

Here is where TIA says the books are truthful in order of the states with the biggest surpluses.

1) Alaska
2) North Dakota
3) Wyoming
4) Utah
5) South Dakota

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Gregory Bresiger
Gregory Bresiger

Gregory Bresiger is an independent financial journalist from Queens, New York. His articles have appeared in publications such as Financial Planner Magazine and The New York Post.

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