In accordance with an article published on NJ.Com this past week, New Jersey’s low-end credit rating could fall again if the state Supreme Court rules that retired public workers are entitled to yearly increases (COLA) in their pensions, according to Moody’s Investors Service.

A lawsuit challenging one of Governor Christie’s pension-reform laws is pending at the high court, specifically over a section that froze pensioners’ yearly cost-of-living adjustments. The court is expected to hear oral argument at its new term, which begins next month.  Analysts at Moody’s issued a rare warning on Monday that New Jersey’s A2 credit rating, one of the lowest among the 50 states, could go down again if Christie received “an unfavorable court decision in the pension litigation regarding COLAs,” Moody’s said.

This year, the Supreme Court ruled 5-2 that another section of the law – committing billions of dollars over seven years to replenish the pension system – had no legal force. The decision effectively freed Christie from having to find billions of dollars he had promised for the pension system in 2011, and marked a defeat for the state’s public workers and retirees.

On Tuesday, another agency, Fitch Ratings, said that court ruling would ease some of the state’s budget woes in the short term even as it left the pension system “more exposed to future under-funding.”

Fitch, in a review of school construction borrowing, did not upgrade New Jersey’s bonds from their “A” rating, but it did revise the state’s financial outlook from negative to stable, noting several improvements. Christie had seen the state’s credit rating downgraded three times each by Fitch, Moody’s and Standard & Poor’s under his watch.  Fitch analysts said Tuesday that Christie had become more conservative and accurate in predicting economic growth, what they called a welcome departure from the trend of missed forecasts and billion-dollar budget holes that had “plagued the state” earlier in his governorship.

Democrats and labor unions say they have ruled out working with Christie, who is running for the Republican presidential nomination, because he backtracked on his plan to replenish the pension system.

The state pension funds face $40 billion in unfunded liabilities, according to state actuaries, a figure that grows each time the state skips or slashes its yearly contribution to workers’ retirement accounts. More than 770,000 public workers and retirees are beneficiaries of the pension system, which experts say is on track to go broke in a decade.

Lawyers involved in the new round of pension litigation say that whatever the Supreme Court rules, it will have a dramatic effect on the state’s finances. When Christie signed the law freezing pension benefits in 2011, the move was expected to save tens of billions of dollars in pension costs over two to three decades.

A group of retired government lawyers and labor unions is arguing before the Supreme Court that the move was illegal because pensioners had been promised the yearly increases by another law enacted in 1997.  A state appeals court agreed in a decision issued last year, although it stopped short of ordering Christie to resume the pension increases. Whatever happens next is up to the Supreme Court. The justices could order Christie to resume the payments, dismiss the case or ask for more hearings at the trial level.

It is unclear how many retirees would be affected by the court’s ruling. The appeals court said only those workers who were on the job or began their careers from 1997 to 2010 and went on to serve long enough to collect a pension would qualify, but the court also speculated that a larger class of retirees could be covered.

A credit rating downgrade is a signal to investors that the state’sbonds have become riskier. Typically, a downgrade leads lenders to raise borrowing costs when the state seeks funds for school or road projects. But the effect on the state has been tamped down because the Federal Reserve has kept interest rates at near zero in recent years.

This is yet another Chapter in the Christie Administration’s saga to reduce established employee benefits and retiree benefits.  We will keep you posted as this story develops.