The U.S. economy is due for another recession, and every state needs to be asking themselves one simple question, are they ready? Economists have already answered, absolutely not. Following the 2008 recession, state economies suffered revenue losses and have yet to recover fully; many remain ill-prepared for a future economic collapse.
During recessions states often enter critical times of declining state revenue. While this does not look the same during every recession, there is a clear trend. A Moody’s Analytics report explains that tax revenues are a function of money moving through an economy; therefore, as economic activity slows, tax revenues follow a similar trend.
In the 2000-2001 recession, revenues eventually took a hit in 2002, dropping 2 percent across the board, according to the National Association of State Budget Officers. In the 2008-2009 recession, revenues hit their bottom in 2010, falling 11.7 percent nationally. That prompted a massive federal bailout by the Obama-Reid-Pelosi Congress, infusing $145 billion to states in 2009 and another $26 billion in 2010 to forestall budget cuts.
With the federal government $20 trillion in debt, states cannot expect another hardy bailout from taxpayers.
Yet state revenues are diminishing once again, and most states have failed to maintain “rainy day funds” to prevent a recession from turning into a devastation. According to the Center on Budget Policy and Priorities, states experienced a $7.5 billion revenue shortfall below expectations in 2017, with another $20.3 billion deficit expected in 2018.
Moody’s Analytics compared the actual revenue reserves states have to fund projects with the necessary revenue and conducted a stress test to test which states could withstand a recession this year. The result, only 16 states have adequate revenue to combat a recession. They continue, “An additional 19 states are within 5 percentage points of the funds they would need to withstand a moderate recession…Unfortunately, though, 15 states fall more than 5 percentage points below what they would need to withstand even a moderate recession. What is more, a handful of these have no appreciable fund balances whatsoever, making them extremely vulnerable to another economic downturn.”
Oklahoma, North Dakota, Louisiana, New Jersey and Illinois are among the least prepared states for an economic downturn, all with less than 4 percent saved.
A spike in demand for state programs such as Medicaid has fueled increased costs at the state level and places pressure on state governments to increase revenue acquisition. Underfunded pension liabilities have also been a significant contributor to economic woes for state governments. New Jersey has set aside just 31 percent of what it needs to pay pensions costs. Kentucky at only 31 percent, Connecticut at only 41 percent and Hawaii at only 51 percent are the worst off.
In a desperate attempt to combat this lack of revenue, Illinois dedicated 32 percent of every dollar of revenue to paying interest on state debt, along with contributions to fund pensions and other retirement benefits, which sat at only 36 percent funded this year.
States must embrace fiscal conservatism, or they will be placed in the same position as Illinois, putting unreasonable taxes on their citizens in a desperate attempt to gain revenue. During a recession, this will only prevent individuals from gaining access to their own capital, so states must act now to reduce expenditures and increase revenue.
Historically speaking, the U.S. is due for another recession, the question is whether states will take the necessary steps to avoid the potential downsides. States should have been preparing funds in the event of a crash for years after the last recession. But with revenues diminishing once again, it may already be too late.
Natalia Castro is a contributing editor at Americans for Limited Government
