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When the United States economy finally slows down and begins its slog through another economic downturn, Illinois will not be ready.
Along with New Jersey, credit rating agency Moody’s said the two states are the only ones in the country ill-equipped to handle the financial stress of the next recession.
The agency graded states on fiscal reserves, financial flexibility as measured by fixed costs and revenue volatility. Illinois’ pension debt in ratio to revenue sources was the worst in the nation.
The state fares generally well in regard to volatility at the moment, but applying progressivity to the state’s income tax, Gov. J.B. Pritzker’s signature proposal to pay the state’s bills, would introduce greater volatility.
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“If revenues declined to a degree equal to the worst one-year decline they had experienced in the past, they would not have enough reserves available to cover even half the shortfall,” the report said of Illinois, New Jersey, Pennsylvania, Louisiana and New York’s reserve funds. “They would have to rely on other tools, such as midyear spending cuts, revenue increases, or one-time measures like borrowing.”
Due to high federal debt loads, Moody’s predicts that states may not get as much assistance as they did during the Great Recession.
“The economy will enter the next recession with less fiscal space than before the financial crisis. Thus the next time the economy experiences a large negative shock that pushes it into a recession, concerns around the level of federal deficits and debt, in addition to a polarized political environment, may hinder adequate counter cyclical fiscal response at the federal level,” it said.