LOS ANGELES — California is the least prepared to weather a recession of the four most populous states, according to a Moody's Investors Service fiscal stress test.
The rating agency issued a report Thursday that focused on California, Texas, New York, and Florida, but included a brief analysis of 20 other states.
"Historically, California has shown vulnerability as the center of the highly volatile tech industry and is reliant on personal income taxes, while Florida was the epicenter of the most recent housing slump," said Emily Raimes, a Moody's vice president and senior credit officer. "Texas and New York have seen lesser declines amid lower oil prices and Wall Street downturns."
Moody's found that Texas is better prepared than Florida, New York and California based on revenue volatility, the ability of reserves to cover a potential first-year revenue shortfall, greater revenue and spending flexibility, and fixed costs as a percentage of revenues.
The measures analysts assessed provide an indication of recession readiness of the most populous states during the next two years, Raimes said.
California trailed the other three due to its revenue volatility, weaker financial flexibility, and lower reserve levels, analysts wrote.
Moody's rates Texas Aaa, with a stable outlook; Florida Aa1 with a stable outlook; New York Aa1 with a stable outlook; and California Aa3 with a stable outlook.
Moody's also included an appendix in the report briefly analyzing the same criteria with the 20 most populous states. It finds the states of Texas, Missouri and Washington most prepared for a recession.
California and Illinois, rated Baa1 with a negative outlook, are least prepared, Moody's said; the other 15 are moderately prepared.
According to Moody's, Texas' reserve levels, known as a rainy day funds or budget stabilization funds, provide substantially higher deficit coverage in a potential economic downturn because they provide ample coverage for a major single year revenue decline. Florida also has adequate reserves to cover a deficit, while California and New York fall short.
The report "State Government – US: Fiscal Stress Test: Ability to Withstand Next Recession Depends on Reserves, Flexibility" finds greater revenue volatility in California and Florida than in New York and Texas.