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All Contents © 2019The Kiplinger Washington Editors
By David Payne, Staff Economist
| January 25, 2019
Most state budgets are in better shape now than they were before the last recession, thanks to steady growth in employment and the resulting rise in tax revenue. Many states have been socking away cash in rainy-day funds for the next recession, and about half of all states have enough on hand to tide them over in a typical downturn, such as the 2001 tech bust.
But many states will struggle when things go south for the economy, even in a moderate recession, which will surely happen eventually. The most vulnerable states have little savings, or they stand to see revenues fall steeply because they depend heavily on either income taxes or levies on energy production to fund their budgets.
These 11 states would have to either raise taxes or cut spending by more than 5% in the event of a typical recession. Is your state on the list? Take a look.
Reserve, revenue and budget data are from the National Association of State Budget Officers. Recession impact on state revenues calculated by Moody\'s Analytics.
PERCENTAGE POINTS SHORT OF RAINY-DAY FUNDING NEED: 18
See Louisiana’s Full State Tax Profile
The Bayou State depends heavily on oil and gas revenues, so it could be hit harder than most states when a recession causes energy prices to fall due to lower demand. The state’s reserves are only 3% of the state’s general fund, well short of the nearly 22% cushion that’s needed.
PERCENTAGE POINTS SHORT OF RAINY-DAY FUNDING NEED: 11
See Illinois’s Full State Tax Profile
The Prairie State’s reserves are almost nonexistent. A severe pension funding shortfall and political budget gridlock are two of the challenges Illinois faces in trying to build its reserves.
See New Jersey’s Full State Tax Profile
In the Garden State, the reserves are only 2% of the state’s general fund, and there are obstacles to increasing them: Public pensions are severely underfunded, and New Jersey pays the 4th-highest debt service ($4 billion per year), after California, New York and Illinois.
PERCENTAGE POINTS SHORT OF RAINY-DAY FUNDING NEED: 10
See North Dakota’s Full State Tax Profile
As crude oil prices improved last year, North Dakota made a lot of progress preparing for the future, with reserves now up to 13% of the state’s general fund. However, more is needed in the Peace Garden State. Oil prices fall along with demand during a recession, so North Dakota’s cushion needs to be 23% in order to cover the expected shortfall in revenue. That may be difficult to achieve given the current low oil prices.
PERCENTAGE POINTS SHORT OF RAINY-DAY FUNDING NEED: 8
See Wisconsin’s Full State Tax Profile
The Badger State’s reserve balances are low, at only 3% of the state’s general fund, and they’re headed in the wrong direction. Wisconsin’s divided government, with a newly elected Democratic governor and a Republican legislature that moved to restrict his powers, does not bode well for future fiscal cooperation.
See Oklahoma’s Full State Tax Profile
Like North Dakota, oil-rich Oklahoma has also boosted savings this past year as oil prices climbed. And also like North Dakota, Oklahoma needs to do more. That may be difficult given the current low oil prices.
See Kentucky’s Full State Tax Profile
The Bluegrass State is among the most vulnerable because its reserve balance is so low: just 1% of the state’s general fund. Kentucky’s public pensions are less than 50% funded, on average, creating more demands on future revenues and making it harder to build reserves.
PERCENTAGE POINTS SHORT OF RAINY-DAY FUNDING NEED: 7
See Virginia’s Full State Tax Profile
Reserve balances in the Old Dominion are only 2% of the state’s general fund, and the state is particularly vulnerable because it relies on income tax for 70% of its revenue. Income tax revenue declines more during recessions than revenue from other sources.
See Missouri’s Full State Tax Profile
Despite a current reserve balance of 7% of the state’s general fund, more is needed in the Show-Me State because Missouri would find its Medicaid spending growing in a recession faster than that of most other states. The state also relies on income tax for 70% of its revenue. Again, income tax revenue declines more during recessions than revenue from other sources.
See Pennsylvania’s Full State Tax Profile
Reserve balances are almost nonexistent in the Keystone State. Public pensions are severely underfunded, which will make it tougher to allocate money to the state’s reserves. Making matters worse, Medicaid spending here is among the highest in the country, both on a per-person basis ($8,780) and as a percentage of total state government expenditures (39%).
PERCENTAGE POINTS SHORT OF RAINY-DAY FUNDING NEED: 6
See Arizona’s Full State Tax Profile
Arizona's severe housing bubble back in 2005-2006 left many homeowners with a high level of mortgage debt. These borrowers would be more likely to default in a recession, and the state could be hit a little harder than most. Arizona needs reserves equal to 13% of its budget, much higher than its current cushion of only 7%.