After a couple years of robust tax collections, states across the U.S. are better prepared than ever to weather a potential recession, according to a report released Monday that examines states’ savings.
The good news in the report from Moody’s Analytics is tempered by the reality that one-fifth of all states still have nowhere near enough money set aside to survive a recession without resorting to spending cuts or tax hikes.
And some states with healthy surpluses haven’t specifically designated them for rainy day funds, meaning lawmakers and governors still could spend the money before a recession occurs.
Moody’s Analytics does not project a recession to begin in 2020. But a survey of business economists this fall forecast a 69% chance of a recession beginning by mid-2021.
If a recession occurs, “state governments as a whole have never been more prepared for a downturn,” the Moody’s Analytics report concludes.
A total of 28 states have enough cash on hand to offset a projected decline in tax revenue and rise in Medicaid spending that would stem from a moderate recession, Moody’s Analytics determined. An additional 12 states are close enough — within 5 percentage points of the amount needed — that they also could likely avoid taking drastic measures to keep the state afloat.
That’s an increase in the share of all states in reasonably good financial shape since a similar Moody’s Analytics report last year, which found two-thirds of the states were prepared. States rich in natural resources such as oil, gas and coal were among the leaders in building reserves to guard against a recession. Wyoming, Alaska, North Dakota and Texas all ranked near the top of the Moody’s Analytics list.
States have been able to build surpluses largely because a robust economy has generated more tax revenue than had been budgeted. After two years of slow growth in tax collections, state general fund revenues grew by 6.9% in the 2018 fiscal year and by additional 4.2% in 2019, according to the National Association of State Budget Officers.
States directed part of that new revenue to public school funding, social welfare programs and one-time infrastructure spending. They also socked away more cash in rainy day funds, according to both Moody’s Analytics and the state budget officers association.
State reserves “now are at levels greater than seen before. So states really have learned their lessons from the past in terms of the last two or three recessions,” said John Hicks, executive director of the National Association of State Budget Officers.
Moody’s Analytics found 10 states with a greater than 5 percentage point shortfall in the amount of reserves necessary to survive a moderate recession. Louisiana ranked the worst, followed by Illinois, Kentucky, Oklahoma and New Jersey. Rounding out the bottom 10 were Pennsylvania, Mississippi, Arkansas, New Hampshire and Florida.
Louisiana tapped into its budget reserve fund several years ago to cover financial problems and has been gradually replenishing the fund. It plans to transfer nearly $134 million to the rainy day fund next year from a $535 million surplus. That would bring the balance above where it was when Democratic Gov. John Bel Edwards took office four years ago.
Moody’s Analytics said that several states struggling to stockpile reserves — including Illinois, Kentucky and New Jersey — can trace their troubles to underfunded state pension plans that are now demanding more state money.
Illinois Gov. J.B. Pritzker, a Democrat, is backing a proposed constitutional amendment on the 2020 ballot that would repeal the state’s flat income tax in favor of a graduated one that he projects would generate an extra $3 billion annually. Pritzker has said some of the money could help pay down billions of dollars of past budget debts and go toward reducing the state’s $134 billion funding shortfall for its pension systems.
Kentucky’s need to set aside more money for potential hard times wasn’t a main issue in this year’s hotly contested gubernatorial election, where Democratic Attorney General Andy Beshear ousted Republican Gov. Matt Bevin. Instead, the candidates focused on pay raises for public school teachers, pensions, health care, economic development and the impeachment proceedings against President Donald Trump.
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