PHOENIX - Most of the top 10 debt-issuing states have only a limited ability to weather even a moderate recession, S&P Global Ratings said Tuesday.
The simulation of a recession’s effects on California, Illinois, New York, New Jersey, Connecticut, Florida, Washington, Massachusetts, Pennsylvania and Wisconsin offered an “ominous” look at the readiness of U.S. states to deal with a recession, said S&P analyst Gabe Petek.
While Washington, Florida, and New York all maintain reserve balances in excess of the shortfalls S&P projected for its recession scenario, the rest of the states would fall short by various degrees.
“We’ve begun the eighth year of an economic expansion, yet we still have 20% of the state sector on a negative outlook,” Petek told The Bond Buyer. Petek said the results of the study aren’t reassuring given the volatility in global markets following Britain’s “Brexit” from the European Union and a possible slowdown in the Chinese markets.
“Of the 10 we sampled, Illinois, Pennsylvania, New Jersey, and Connecticut are the four states most susceptible to significant fiscal stress,” according to S&P. “Budget reserves in these states equal less than half of the potential revenue underperformance that we estimate is possible in the first year of a recession of moderate intensity.”
The study found that California, Massachusetts, and Wisconsin fall somewhere in-between the well-positioned and the most vulnerable states.
“Budget reserves in these states are insufficient to fully cover the revenue shortfall in our stress scenario, but equal at least 50% of the potential gap,” S&P determined.
Petek said the study also made an effort to tell the unique “credit story” in each state by evaluating its unique political and budgetary structures. In California, for example, the governor has limited ability to substantially alter course once a budget is legally in place.
“There is minimal executive authority for the governor to unilaterally restrict spending or impose allotment reductions after the budget takes effect. The main line of defense is the state's special fund for economic uncertainty and—if the governor declared a financial emergency—the ability to draw down upon up to half the balance in the budget stabilization account,” the rating agency noted.
S&P has long stressed its view that states should be shoring up their reserves during this period of economic expansion, as moderate as that expansion has been. The recovery that began in 2009 is already lasted longer than all but three expansions since the end of World War II. S&P’s projection is for that recovery to hold into 2017.
“It’s a reminder of how important fiscal management is in the credit profiles of these states,” said Petek.
