U.S. States Aren't Prepared for the Next Fiscal Shock

http://www.bloomberg.com/news/articles/2015-04-10/recession-scarred-u-s-states-ill-prepared-for-next-fiscal-shock

U.S. states, still grappling with the lingering effects of the longest recession since the 1930s, are even more vulnerable to another fiscal shock.

The governments have a little more than half the reserves they’d stashed away before the 18-month recession that ended in June 2009, according to a report last month by Pew Charitable Trusts. New Jersey, Pennsylvania, Illinois and Arkansas have saved the least.

Skimpier rainy-day funds have implications for the national economy, which is in its sixth year of expansion. States would have to cut spending or raise revenue by a combined $21 billion in the event of a recession, exacerbating economic weakness, Moody’s Analytics found in a stress test of state finances. Reserves take on added importance for governments balancing obligatory pension and health-care costs with swings in tax collections, said Daniel White, a senior economist at the arm of Moody’s Corp.

“What the Great Recession has shown is that things have fundamentally changed in terms of the way that state fiscal conditions are determined,” White said from West Chester, Pennsylvania. “They need to be much more prepared for very volatile fiscal conditions than they had been in the past.”