A new analysis of states’ readiness to respond to a recession found 48 are strongly or well prepared.
And then there’s New Jersey and Illinois.
Moody’s Investors Service deemed these two states the absolutely worst prepared based on their high fixed costs, volatility in their revenues, limited reserves and vulnerability of their public pension systems.
This sort of report card isn’t new for New Jersey.
In a prior analysis another ratings house, S&P Global rating, estimated the state would lose 18 percent of its major tax revenues during a moderate downturn and 20 percent during a severe one. And the state’s meager savings could cost just a teeny sliver of those losses.
Energy states like Alaska and North Dakota have the most volatility in their tax collections, and New Jersey lands in the middle of the pack. That’s because New Jersey is increasingly relying on taxes vulnerable to economic conditions, such as the income and corporation business taxes.
The gross income tax, which is highly dependent on wealthy filers, created some havoc this year as taxpayers delayed making payment to the state in response to federal tax law changes. But concerns just a couple months ago that the slumping income taxes could blow a hole in the budget were eased when the state treasurer announced last week they had rebounded in April.
From last year’s budget battle came a new, 10.75 percent top marginal tax rate on personal income over $5 million, which will make the state’s highly progressive income tax system even more so.
In this latest report, Moody’s warned investment losses would mean trouble for New Jersey’s pension system for public workers, which is among the worst funded in the country.
For example, assets in the Teachers’ Pension and Annuity Fund would only be enough to write checks to pensioners for four years if it “suffered steep investment losses,” Moody’s said, adding there would be pressure on the state to pump in more money to shore up.
Moody’s also remarked on the state’s challenges to responding to the revenue shortfalls accompanying an economic downturn, ranking its reserves second to last and saying its fixed pension, health care and debt service costs limit its flexibility.
While 26 states have enough set aside for a rainy day to cover a year’s worth of revenue declines, New Jersey could not even cover even half of its projected losses.
This report comes as New Jersey’s leaders are debating what to do with $317 million in extra cash it expects to pocket at the end of the fiscal year in June. While Gov. Phil Murphy wants to stash it in a rainy day fund, lawmakers say the state has too many unmet needs now.
“It’s raining in New Jersey,” state Senate President Stephen Sweeney, D-Gloucester, said Monday.
Treasurer Elizabeth Muoio said this latest report supports the administration’s recommendation to boost the state’s reserves, saying “New Jersey has been punting on its responsibilities for far too long.”
“We are still far behind most states when it comes to being adequately positioned to weather a future economic downturn. This administration is committed to better preparing us for the future.