A Moody’s report on Monday analyzed just how ready the country is for a recession.
And just two states failed the test: Illinois and New Jersey.
Moody’s rated the states on revenue volatility, coverage by reserves, financial flexibility and pension risk. The latter is an obvious strain on Illinois, a state with an estimated $133 billion unfunded pension liabilities and $7.36 billion in unpaid bills.
“While most states have healthy reserves and inherently strong fiscal flexibility, Illinois and New Jersey both have low levels of reserves relative to the potential revenue decline in our recession scenario,” Emily Raines, Moody’s Vice President said in a statement. “In addition, they both show weakness in their pension risk scores.”
In total, the report found 22 states were strongly prepared, 26 were moderately prepared and two states — Illinois and New Jersey — fared “weaker in recession preparedness.”
But before anyone hits the panic button, Moody’s notes in its report that economic conditions in the country are “strong” and the possibility of a recession beginning with the next year appears to be low. Still, the report, notes states are aware a downturn “will come eventually” and it’s best to have reserves in place.
The report says Pennsylvania, New Jersey, Louisiana, New York and Illinois have the lowest coverage by reserves.
“If revenues declined to a degree equal to the worst one-year decline they have experienced in the past, they would not have enough reserves available to cover even half the shortfall,” the report says. “They would have to rely on other tools, such as midyear spending cuts, revenue increases, or one-time measures like borrowing.”
The report, however, notes, Moody’s “would not expect significant credit deterioration in a recession, although these credits could weaken more or faster than most states.”
The report also notes Illinois is “developing a strategy to improve its pension funding and structural budget balance.”
Illinois’ credit rating stands at Baa3, one notch above “junk” status. The ratings are important because they help determine the interest rates at which the state borrows money.