10 States Most Unprepared for This Deep Recession
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.
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 had been socking away cash in rainy-day funds, and about half of all states had enough on hand to tide them over in a typical downturn, such as the 2001 tech bust.
But this is no typical downturn: Indeed, a brutal recession is already upon us, and many states will struggle. 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 10 states will have to either raise taxes or cut spending by more than 4% -- maybe much more. 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.
The Bayou State depends heavily on oil and gas revenues. With oil prices well below $30 a barrel, it will be hit harder than most states as this recession in particular causes energy prices to fall due to lower demand.
The state’s reserves are only 4% of the state’s general fund, well short of the nearly 26% cushion that’s needed for this deep recession.
The Prairie State’s reserves are tiny at 1.6%. A severe pension funding shortfall, a high level of debt, and perennial political budget gridlock are three of the challenges Illinois faces in trying to build its reserves. The recession will add greatly to these burdens.
The Sooner State also depends heavily on oil and gas revenues, with mining accounting for nearly a quarter of the state's economy. Yet, because of the oil price bust, only 26 drilling rigs are still operating in the state, down from more than 100 less than a year ago. States with economies that are heavily dependent on commodities need to have hefty fiscal reserves to carry them through boom-bust cycles, but Oklahoma's are not enough.
In the Garden State, reserves are only 3% 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. The recession will add greatly to these burdens.
The Bluegrass State is vulnerable because its reserve balance is low -- just 3% of the state’s general fund. Kentucky’s state employees pension fund is only 16% funded, the lowest funding level of any large public pension in the country. The shortfalls were severe even before the recession.
At first glance, it might seem the Sunshine State is doing okay with 8% reserves. However, Florida’s economy is more vulnerable to the national recession than most. The state’s economy depends heavily on tourism, which is likely not coming back for a while, and on housing construction.
The Granite State is proud that it has no income tax or general state sales tax. But that makes it hard to build reserves because the state has to cobble together revenue from multiple sources.
Corporate income tax accounts for a third of the state’s revenue; a quarter comes from taxes on restaurant meals, room and car rentals and telecom services; and 10% from the tobacco tax. Tax revenue from these sources will be hit hard in this recession.
- The Sunflower State will feel the recession hit a little harder than other states because 16% of its economy is dependent on manufacturing -- particularly, aviation, one of the industries hardest-hit by the coronavirus. Kansas has five large aircraft manufacturers. Spirit Aero Systems, headquartered in Wichita, makes fuselages for Boeing's 737 Max, which had been put on hold even before the virus hit.
Reserve balances are very modest at 1.5% of spending in the Keystone State, the lowest of any 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 and as a percentage of total state government expenditures (36%). The recession will add greatly to these burdens.
- Arkansas has had a long history of not keeping fiscal reserves. The state began to build a reserve fund in 2016, but the fund is capped at around 3% of the budget. Once again, Arkansas will have to turn to other means to meet increased demands.