Swelling Savings Leaves States More Prepared for Next Recession

(Bloomberg) -- The nine years that have passed since the end of the last recession seem to have given many U.S. states enough time to save for the next one.

Twenty-three state governments have sufficient reserves to weather the budget shortfalls that would come with a moderate economic contraction, up from 16 last year, according to a report published Monday by Moody’s Analytics. Another 10 states have most of what they’d need, according to the company.

The savings have left states in a much better position than they were a decade ago, when the housing-market bust and financial crisis left them reeling from deep budget deficits, Moody’s said. That may leave them exerting less of a drag during the next recession by lessening the need to cut spending deeply and eliminate government jobs.

"The amount of fiscal drag from states and local governments should be considerably less during the next recession and ensuing recovery than the U.S. experienced during and after the Great Recession," Moody’s economists led by Dan White wrote. "However, a troubling number of states are still not ready."

The report considers states prepared if they have reserves within 1 percentage point of what they’d need to weather a moderate downturn.

While the number of well-prepared states has grown, so has the number of those that are not. Seventeen don’t have the savings for a moderate recession, up from fifteen a year ago, according to the report.

Louisiana, North Dakota, and Oklahoma were rated the least prepared for the second year in a row, though their finances have shown some improvement. Arkansas, Michigan, Mississippi, New Hampshire, Kansas, Wisconsin, Pennsylvania, Illinois, Arizona, Missouri, Virginia, Kentucky, Montana, and New Jersey also performed poorly in the report’s stress tests.

On average, a state would need to have reserves sufficient to cover about 11 percent of its budget in order to withstand the next recession without raising taxes or cutting spending.

To contact the reporter on this story: William Green in New York at wgreen35@bloomberg.net

To contact the editors responsible for this story: James Crombie at jcrombie8@bloomberg.net, William Selway, Michael B. Marois

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