Many U.S. States Are Woefully Unprepared For The Next Recession

…The Wall Street Journal…writes…that “many U.S. states have been slow to improve their finances nine years into the economic expansion raising a risk they won’t be prepared when another downturn hits, making them susceptible to big spending cuts that make the next recession worse.”

The original article has been edited here by munKNEE.com for length (…) and clarity ([ ])

The problem for most states is that aging populations mean that more money is being spent on Medicaid – 59% higher in 2016 than in 2010 – and pensions while revenues have largely been stagnant and, while a booming economy might temporarily boost revenues, “some of these longer-term pressures are definitely not going away,” says Gabriel Petek, managing director at S&P Global Ratings.

• Measured as a share of spending, 21 states had smaller rainy day funds in 2017 than they did in 2008, according to data from the National Association of State Budget Officers compiled by the Tax Policy Center.
  • North Dakota had only 1.5% of its expenditures in a rainy-day fund in the 2017 fiscal year, down from 16.6% in 2008.
  • Oklahoma’s rainy day fund had 1.6%, down from 9.3%.
  • New Jersey emptied its rainy day fund in 2009 and has yet to begin refilling it.
• Many states governments have seen their bond ratings downgraded during this expansion for not taking the appropriate measures to get their fiscal houses in order. 
  • 11 states have lower bond ratings than they did in 2010 while only five have higher ratings, according to Moody’s Investors Service.
  • 7 states have worse ratings – and 6 have better ones – since the recession according to Fitch Ratings.
  • Analysts at S&P Global rate 12 states lower than in 2010 and 10 states higher.

“It’s very important in our view that during the good times the states should be building up their fiscal resilience and that really stands out as an area that’s been lacking throughout this recovery,” said Gabriel Petek, managing director at S&P Global Ratings.

Conclusion

…Boston Fed President Eric Rosengren explains that, while there are levers that all the states could think about in terms of preparing for the next economic downturn, it doesn’t seem like there is that much movement in that direction right now in many states.