New Jersey's weakest municipalities are on the mend, Moody's reports

The lowest-rated cohort of New Jersey municipalities are on a trend of strengthening finances, according to a report from Moody’s Ratings.

Economic improvement, better management and stronger state support has helped the municipalities achieve their strongest finances in a decade, the report said.

The cohort members — which include Newark, Atlantic City, Paterson, Irvington, Salem, Trenton, Pleasantville, Union City and Weehawken — have lowered their deficit spending and strengthened their pension contributions, according to the report.

“It has, in general, been a favorable credit environment for municipalities in New Jersey, but we wanted to highlight that that favorable environment has extended to the weakest credits in the state,” said Dan Seymour, the report’s author.

All nine of the municipalities, which are rated Baa or lower, have seen a positive rating action in the last year; five were upgraded and four had a negative outlook removed.

“The nine municipalities in the Baa-and-below cohort now collectively hold more than $200 million of current fund balance, the highest level in more than a decade,” the report said.

The municipalities’ economies and tax bases have grown significantly, especially in recent years. One driver is higher demand for low-income housing, which has broadened the tax base in poor cities like Trenton and Salem, Seymour said.

State support has played a key role in the cohort’s finances, Seymour said, primarily through its transitional aid program. In the program, municipalities can apply for aid from the state to balance their budgets, and as a condition, they submit to a state fiscal monitor.

“There’s a two-pronged benefit of this type of aid. One is that it provides the funds necessary for a struggling municipality,” Seymour said. “The other is that it strengthens governance through providing state oversight of the budget.”

Accordingly, almost all nine municipalities are in a better budgetary position than they were five years ago. Their aggregate $200 million of current fund balance is equal to 10% of their aggregate revenue, the report notes; in 2013, their combined current fund balance was negative.

The municipalities’ deficit spending and pension liabilities have declined in the last five years, the report said.

The municipalities can continue to count on state aid going forward; in fiscal year 2025, New Jersey’s transitional aid program had its highest funding level since 2012.

Many of the municipalities in the cohort have also benefited from positive governance changes, Seymour said, in the form of new mayors, new city council members or a better relationship with the state.

“When we look at why these municipalities had been in a weak position, it’s not always going to be the same story. There were some governance challenges, there was some fiscal pressure, and there were some idiosyncratic stories,” Seymour said. “But to a large degree, the improvement has all been for similar reasons: better governance, strong relationship with the state, positive economic trends, lower leverage.”