It’s no secret that the finances of most US states are in shambles. For many, overly generous pension benefits have led to severe underfunding that threatens to drain state coffers, like in Illinois, where pension liabilities ballooned by a cumulative 1,067% between 1987 and 2016 while revenues for the state’s general fund rose just 236% during that time.
While regular readers are no doubt acquainted with our musings on the looming pension crisis (a problem that is increasingly global in scope), the Wall Street Journal has apparently only just stumbled on to the story, writing in a story entitled “Many States Are Likely Unprepared for Next Downturn” that “many US states have been slow to improve their finances nine years into the economic expansion. That raises a risk they won’t be prepared when another downturn hits, making them susceptible to big spending cuts that make the next recession worse.”
The problem for most states is that aging populations mean that more money is being spent on medicaid and pensions while revenues have largely been stagnant. And while a booming economy might temporarily boost revenues, “some of these longer-term pressures are definitely not going away,” said Gabriel Petek, managing director at S&P Global Ratings.
An aging population is also putting pressure on state Medicaid budgets and pension funds. State pension contributions were 78% higher in 2017 than in 2010, according to census data. And state Medicaid payments were 59% higher in 2016 than in 2010, according to the Centers for Medicare and Medicaid Services.
Many US states have depleted or nearly depleted emergency funds. With some states like Oklahoma having only 1.6% of expenditures in their rainy day funds.
Measured as a share of spending, 21 states had smaller rainy day funds in 2017 than they did in 2008, according to data from the National Association of State Budget Officers compiled by the Tax Policy Center.
North Dakota had only 1.5% of its expenditures in a rainy-day fund in the 2017 fiscal year, down from 16.6% in 2008. Oklahoma’s rainy day fund had 1.6%, down from 9.3%. New Jersey emptied its rainy day fund in 2009 and has yet to begin refilling it.
Many states also have lower credit ratings now than they did during the crisis, which will raise the cost of borrowing during a recession.
Many states governments have seen their bond ratings downgraded during this expansion for not taking the appropriate measures to get their fiscal houses in order. Eleven states have lower bond ratings than they did in 2010 while only five have higher ratings, according to Moody’s Investors Service. Fitch Ratings lists seven states with worse ratings and six with better ones since the recession. And analysts at S&P Global rate 12 states lower than in 2010 and 10 states higher.
“It’s very important in our view that during the good times the states should be building up their fiscal resilience and that really stands out as an area that’s been lacking throughout this recovery,” said Gabriel Petek, managing director at S&P Global Ratings.
At stake are widely used public services like roads, police and schools. A recent Supreme Court ruling requiring online retailers to pay state sales tax could help boost revenues while a Trump’s tax plan will help raise taxable income in some states. But with President Trump’s trade war threatening to hammer agricultural states (which could seriously impact nationwide GDP figures), states are finding themselves in a tough spot. Boston Fed President Eric Rosengren explains, US states are simply referring to do what needs to be done to prepare for the next recession. “There are levers that all the states could think about in terms of preparing for the next economic downturn,” Rosengren said. “It doesn’t seem like there is that much movement in that direction right now in many states.”
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