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Fixed-Income Insights

The state’s credit quality is being closely watched by muni investors, as voters choose a new governor.

[Note: This article is from the October 2017 edition of The Muni Quarterly.]

In the last several months, political headlines have been dominated by developments in Washington, D.C. As such, the upcoming New Jersey gubernatorial election has garnered relatively little national media attention. However, the municipal market has been paying significant attention to this contest, given current trends in the state’s creditworthiness. During the Republican Chris Christie’s two terms as governor, New Jersey has been downgraded several times by the major credit rating agencies. The state’s general obligation credit rating is currently 'A3'/'A-'/'A', which is at the lower end of the spectrum for U.S. state ratings.

Following the election on November 7, Christie will be replaced by either Kim Guadagno, the Republican candidate, or the Democratic hopeful, Phil Murphy. Guadagno currently is serving as Christie’s lieutenant governor. As New Jersey’s second in command, the lieutenant governor is temporarily put in charge of the state government, located in Trenton, whenever the governor is out of state. As such, Guadagno has significantly more political experience than Murphy (who has no elected experience). Prior to her political career, Guadagno worked as an attorney and as Monmouth County sheriff.

New Jersey's next governor will take the reins of a state that has received a number of credit downgrades in the past several years. 

Murphy has extensive financial and business experience, but limited involvement in politics. He had worked at Goldman Sachs, before retiring in 2006. However, he did serve as chair of the New Jersey Benefits Task Force in 2005, and served as the U.S. ambassador to Germany during 2009–13. Since 2013, Murphy has been preparing to run for governor, establishing his own think tank and political organization. 

State of Imbalance
At the time of this writing, Murphy, according to a number of polls, continues to maintain a lead over Guadagno. Based on reports from the news website nj.com, Murphy has significantly more political and fundraising support, while Guadagno appears to be at a disadvantage largely because of her association with Christie, who has very low approval ratings. However, the election may be closer than expected by observers of the race, based on recent reports that 13% of respondents in one poll remained undecided in the weeks leading up to the election on November 7.

With the state facing a budget that is structurally imbalanced, the next governor will be tasked with motivating the state legislature to implement revenue increases and expenditure cuts.

Each candidate is working to appeal to their respective political bases. Guadagno’s platform for lower taxes (especially those on property) resonates approvingly with her party’s voters, but with fixed costs poised to grow, reducing other expenses to offset potentially lower revenues will be challenging for any eventual governor. Murphy plans to fund new transportation and education initiatives by increasing taxes on corporations and the state’s wealthier residents. In our opinion, this could negatively affect economic growth, as residents already face a sizable tax burden.

Possible Outcomes
The ideal approach, at least as far as investors in the state’s debt are concerned, may lie somewhere in the middle. For New Jersey to fully turn around its finances and improve its creditworthiness, we believe that the state needs new leadership that simultaneously increases revenues and reduces expenditures while fully funding pension obligations.

If Guadagno is the next governor, the municipal market will be watching to see whether there will be prudent expenditure reductions made to offset increasing fixed costs and potentially lower revenues. On the other hand, if Murphy wins and new programs are undertaken, market observers will be eager to learn whether the legislature of an already high-tax state has the political willingness to raise levies further.

Regardless of who wins the election, it is clear that the next governor will have a significant impact on the direction of New Jersey’s credit quality. We will be following closely and factoring in these developments as we make decisions about buying and selling New Jersey municipal bonds for our portfolios.

 

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About The Author

THE MUNI QUARTERLY

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The October 2017 edition offers insights from our analysts on key topics for municipal bond investors, along with essential market information.

July 2017 edition
April 2017 edition

RELATED FUND
The Lord Abbett New Jersey Tax Free Fund invests primarily in New Jersey municipal bonds. View performance, portfolio, documents and more.
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