New Jersey's economy is improving, but it continues to rely on one-time budget fixes, "untested and uncertain" revenue sources and "bullish" revenue assumptions, which will add pressure on future budgets, S&P analyst John Sugden said in a statement.

S&P also cut its rating on the state's appropriation-backed debt to 'A' from 'A+' and its moral obligation debt rating to 'BBB+' from 'A-'. The outlook on all the ratings is stable.

The downgrade puts New Jersey in league with the worst-rated U.S. states. S&P rates only two other states in the single-A category: California at 'A' and Illinois at 'A-.'

In March, Fitch Ratings revised its outlook on New Jersey's 'AA-' rating to negative from stable, citing similar concerns.

The state must close a $786 million budget gap that developed through the first eight months of fiscal 2014, S&P said.

Another big issue bothering Wall Street credit-rating agencies is the state's growing burden to fund retirement benefits for public employees.

The state's plan for public employees was funded at 49.1 percent as of fiscal year end 2012, while its plan for teachers was 59.3 percent funded. About 80 percent or above is considered healthy.

Republican Governor Chris Christie and the Democrat-led legislature tried to address the problem with reforms in 2011 that included stepped-up pension contributions from the state each year for several years.

As a result, the state is on track to make its largest-ever pension contribution of $2.25 billion in fiscal 2015.

"S&P's action today actually underscores what the governor has been saying since January - the rising costs of pension, health benefits and debt service challenge our long-term fiscal health, and requires further reforms," spokesman Kevin Roberts said in an e-mail.

Christie called for additional pension changes earlier this year, although he did not provide a detailed proposal. Democrats have said they will not consider additional reforms.

S&P noted that the state's diverse economic base is showing signs of improvement. The state's residents also have personal incomes that are among the highest in the 50 U.S. states.

But New Jersey "has a long way to go to full recovery" and "stands in stark difference to many of its peers who registered sizable budgetary surpluses in fiscal 2013," S&P said.