New Jersey Is Among America's Least Prepared States If Another Recession Hits

About a decade after the start of the Great Recession that rocked the U.S. economy, New Jersey remains among the states least fit to weather another economic downturn.

In fact, the state's budget's reserves are too low to soften the blow of even a moderate slump, according to a pair of new reports measuring states' readiness. 

The reports also said the state continues to rely on volatile taxes -- such as the income tax, which can fluctuate wildly depending on how the economy is doing -- and that puts revenues at risk.

"Budget reserves are a first-line defense against revenue shortfalls and in a majority of states remain insufficient to absorb the first-year fiscal effects of a moderately severe recession," a S&P Global Ratings report said.

Moody's Analytics pegged New Jersey as 47th among all states in its capability of weathering a recession, followed by Oklahoma, North Dakota and Louisiana. S&P also had New Jersey near the bottom of the list. 

Moody's found the "typical" state would need to sock away the equivalent of 11 percent of its budget to ride out a moderate recession without cutting spending or raising taxes and 18 percent in a severe downturn.

New Jersey state government will spend $38.4 billion this year but only has a tiny fraction of that -- 2 percent -- in its rainy day fund to fall back on.

"We are acutely aware of these concerns," said state treasury spokeswoman Jennifer Sciortino.

"This is why we fought throughout the budget process to build a healthier surplus and secure recurring revenue sources.  This is and will continue to be a priority for us moving forward." 

The reports put some numbers to the problem.

S&P projects that in the first year of a moderate recession, states could lose a combined $71 billion, or roughly 10 percent, of the money they collect from personal income, corporate and sales taxes.

In a more severe downturn, they'll be out $84.7 billion, or nearly 12 percent.

The projected losses are even greater than during the Great Recession, as states are relying increasingly on taxes vulnerable to economic conditions, analysts said.

New Jersey is no exception.

Two of the largest sources of tax revenue here -- personal income and corporation business taxes -- are hard to predict, often fluctuating from year to year.

The gross income tax is highly dependent on wealthy filers, which is why state coffers and lawmakers sighed when billionaire hedge fund manager David Tepper relocated to Florida. 

From this year's budget battle came a new, 10.75 percent top marginal tax rate on personal income over $5 million, which will make the state's highly progressive income tax system even more so.

This, analysts said, also helps explain why New Jersey is at greater risk than others. 

"By states putting more of their eggs in one basket, tax bases have become more dependent on a smaller number of taxpayers with extremely volatile incomes, manifesting higher highs and lower lows for tax collections," said Moody's Analytics in its own analysis.

A moderate downturn could gouge 18 percent of those three tax streams here, as measured by S&P's stress test of the big three taxes.

In a more severe downturn, the loss could reach 20 percent. Only Alaska would lose a bigger share of its income, S&P said.

But that's why states have rainy day funds.

Twenty states have enough reserves to cope with the first year losses in revenue, S&P said. Of course, New Jersey is not among them.

The state's low reserves would cover just 14 percent of the lost revenue in a moderate economic event and 13 percent in a severe one, according to the report.

The four states least capable of cushioning the blow, according to S&P -- New Jersey, Illinois, Kentucky and Pennsylvania -- all have the worst-funded public pension systems in the country.

They're also among the 15 states S&P deemed most at risk, and those underfunded pension systems have something to do with their troubles.

State's don't have a lot of flexibility to cope with a recession outside of increasing taxes and cutting spending. Those with "high fixed costs" like debt service and contributions to post-retirement health and pension benefits have even less wiggle room," S&P said.

"Therefore, the states most at risk to experiencing severe fiscal stress in a recession are those with a combination of a propensity for revenue volatility; insufficient budget reserves to withstand the first-year fiscal deficits associated with a moderate recession; and elevated fixed costs," the analysts said.

Moody's Analytics found New Jersey would lose nearly 12 percent of all revenues in a moderate recession and nearly 17 percent under a severe scenario.

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