Are Fiscal Issues Christie’s Achilles Heel for 2016?

With the Bridgegate scandal apparently fading, New Jersey Gov. Chris Christie is politically rising after leading GOP governors to a solid Election Day showing under his chairmanship of the Republican Governors Association. He personally won re-election last year in a deeply Blue State with 60 percent of the vote.

Yet his administration has stumbled in fiscal management, experiencing a bond rating downgrade this year by all three major rating agencies: Fitch, Moody’s Investors Service and Standard and Poor’s. When asked about the downgrades, Christie showed his typical fieriness.

“We’re trying to address the budget situation, but the fact is that it is not something that should leave them lying awake at night worrying,” Christie told Bloomberg News. “This is, again, I think the ratings agencies going back and being significantly over-aggressive because they were such bums back in ’08 and ’09 and they left everybody hanging out to dry.”

Christie’s defensiveness is inaccurate in a technical sense: ratings teams criticized for their potential role in creating inaccurate ratings on the mortgage-backed securities are structured products analysts, separate from the fundamental credit analysts raising red flags on New Jersey.

And while it’s true the entire financial services industry, including the rating agencies (I experienced this firsthand as a former bond analyst with Moody’s), is undergoing more scrutiny and red tape thanks to Dodd-Frank, under a purely methodological change in April 2010, many states, including New Jersey (which also had its negative outlook removed), were upgraded by Moody’s. This boost happened overnight without any action by the part of governors.

Also, for the fourth time over the last five quarters, Moody’s has increased its share of municipal upgrades relative to downgrades. In context, during the second quarter of 2014, when Moody’s downgraded New Jersey, it changed the ratings on less than 2 percent of its overall muni portfolio of 13,000 rated public finance obligations. Thus it seems far-fetched that New Jersey would be singled out for persecution, and its two subsequent downgrades under Christie’s tenure make it an outlier in a negative way.

Despite his famous showdown with teachers over state finances, this bravado did not translate into tangible change. Christie assumed office in January 2010; Moody’s downgraded New Jersey in April 2011 and again this May for the states “weak financial position resulting from recurring revenue shortfalls and increased reliance on one-time budget solutions, most recently seen in sharp cuts to pension contributions.”

Because fixed costs–pension contributions and debt service–are comprising a growing proportion of state revenues, Moody’s worried that “Restoration of long-term structural balance appears to depend on accelerating economic growth and further pension reforms, which have uncertain timing and impact.”

Additionally, the agency reported that as a result of several years of budget underperformance, the state’s liquidity position has weakened, leaving minimal cushion against further revenue shortfalls.

On pensions, New Jersey is a standout state, but in an unfavorable sense. States must pay into pension systems in specified levels (the jargon term is actuarially determined contribution (ADC)). During fiscal year 2013, 34 states contributed 90 percent of ADC or higher, while four states contributed less than 60 percent of ADC, with New Jersey the lowest at only 28 percent (second-lowest was Virginia, at 41 percent). On a Moody’s adjusted basis, New Jersey’s pension liability is $87.6 billion, or just over $9,800 per person, putting it at fifth place behind Alaska, Connecticut, Illinois and Massachusetts.

Christie’s polarizing personal style–he recently told a heckler to “sit down and shutup” about Superstorm Sandy recovery–yields both accolades and alienation. In a recent Wall Street Journal column on the potential 2016 contenders, Karl Rove wondered “whether his Jersey style sells elsewhere.”

Questions of communication style should be subordinate to actual results and governance. Yet too often in our national political discourse, style trumps substance.