CHICAGO, May 20 (Reuters) - Illinois and New Jersey are the two U.S. states least equipped to cope with an eventual downturn in the U.S. economy due to their inadequate reserves and pension funding pressures, Moody’s Investors Service said on Monday.
A report by the credit rating agency said Illinois and New Jersey lag the rest of the nation where 22 states are strongly prepared to weather a moderate recession without significant harm to their credit, while 26 states are moderately prepared.
“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 Raimes, a Moody’s analyst, said in a statement. “In addition, they both show weakness in their pension risk scores.”
At Baa3, Illinois is the lowest-rated state as a result of its huge unfunded pension liability and chronic structural budget deficits. New Jersey, rated A3, also faces funding pressures after significant historic pension underfunding.
Moody’s noted the two states have taken recent steps to shore up their finances.
With fiscal 2019 revenue coming in over estimates, New Jersey plans to deposit money into its rainy day fund, which has sat empty since late 2008. Illinois’ governor proposed amending the state constitution to replace the state’s flat income tax rate with graduated rates to gain $3.4 billion annually.
The report measured states on four factors: revenue volatility, reserves, financial flexibility and pension risk. Moody’s said given current strong economic conditions, the probability of a recession commencing within the next year appears low.
It warned that U.S. government assistance to states may decline in the next recession.
“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,” the Moody’s report said.
Reporting by Karen Pierog in Chicago Editing by Matthew Lewis