States Ill-Prepared for Next Recession

If states were squirrels most don’t have enough nuts stored for winter – or the next recession.

Standard & Poor’s recently released a report that says 30 states don’t have enough reserves to operate at full capacity during the first year of an economic downturn. The report said the majority of states would have to raise taxes or trim their budgets during the next recession.

In fact, S&P indicates states would fare worse than they did a decade ago during the Great Recession because they rely more heavily on personal income taxes now. The report says those types of taxes make up 55 percent of general fund revenues in 2018, compared to 49 percent in 2008.

Other factors like rising pension costs and increased Medicaid payments will likely make the next recession tougher to weather, S&P said, with 15 states at risk of large revenue shortfalls during the first year of an economic downturn.

“In their fight against recessions, budget reserves are what states send to the frontline,” the report said. “They are an internal source of immediate liquidity and can provide transitional funding to agencies before budget cuts take effect.”

At least a recession isn’t likely given the strong economy. S&P pegged the chance of a recession starting in the next year at just 10 to 15 percent.

Moody’s Analytics also released a study that shows similar numbers – 23 states have enough reserves to withstand a recession. On the other hand, 17 states are very ill-prepared for an economic downturn, the report said, creating a disparity between the states.

The states least prepared for a recession are Louisiana, Oklahoma, North Dakota, New Jersey and Montana, according to Moody’s.

Dan White, a director at Moody’s, told Governing that some states continue to struggle to balance their budgets even with the economy strong. He also notes that different tax structures will effect how states are affected – comparing Pennsylvania’s flat income tax with New Jersey’s more progressive tax structure that would see the latter lose twice as much revenue as the former during a recession.

“All else equal, this is going to result in a faster recovery among the states that are most prepared,” White said. “What’s troubling, though, is we’re seeing an increasing gap between the have and have-nots.”

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Author: Johnny Kampis