U.S. States Aren’t Prepared for the Next Fiscal Shock

U.S. states, still grappling with the lingering effects of the longest recession since the 1930s, are even more vulnerable to another fiscal shock.

The governments have a little more than half the reserves they’d stashed away before the 18-month recession that ended in June 2009, according to a report last month by Pew Charitable Trusts. New Jersey, Pennsylvania, Illinois and Arkansas have saved the least.

Preparation Failure

States were unprepared for the last recession. In 2009, budget gaps totaled $117 billion, about twice the level of reserves, according to Pew, a research group. With more of a cushion, they would’ve cut fewer jobs, White said.

The governments employ about 5.1 million nonfarm workers, about 140,000 fewer than the 2008 peak, Bureau of Labor Statistics data show.

States such as New York and Illinois, more reliant on income levies, should budget more like energy producers Alaska and North Dakota, which are accustomed to revenue swings, White said. Tax collections have become more prone to swings partly because of variability among high earners, he said.

In the next recession, the federal government may not assist states as it did in 2009, with grants for Medicaid and education, White said.

‘Thinking Ahead’

Now’s the time to sock away cash, said White at Moody’s.

California took a page from Massachusetts in learning from the last recession. Massachusetts in 2010 implemented a policy of diverting some capital-gains taxes to rainy-day reserves, said Brenna Erford, manager at Pew.

Full article: U.S. States Aren’t Prepared for the Next Fiscal Shock (Bloomberg Business)

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