Illinois is one of 17 states not prepared at all to weather even a moderate recession — much less a severe economic downturn – according to an analysis released Monday by Moody’s Analytics.
The analysis, released a decade after the Great Recession, is designed to estimate “the amount of fiscal stress likely to be applied to state budgets under different recession scenarios and comparing that stress to the amount of money states have set aside in reserve.”
Twenty-three states have the amount of cash on hand they would need to weather a moderate recession without having to raise taxes or cut spending, and another 10 have most of what they need to survive a downturn.
However, 17 states — including Illinois — are “significantly unprepared for even a small downturn. This will result in some painful decision-making in those states in the next few years and will undoubtedly hold certain states back in terms of economic performance relative to their peers.”
Moody’s estimates a typical state would need to have approximately 11 percent of its general fund revenues put into a reserve fund to weather the next recession without having to raise taxes or cut spending.
To survive a larger downturn akin to the Great Recession without raising taxes or cutting spending, a typical state would need almost 18 percent in reserve, according to the analysis.
Pennsylvania, New Jersey, Montana, Kansas and Illinois are the five states that have nothing in a rainy-day fund, the analysis says.
A moderate recession could have a fiscal shock on Illinois budget of $4.1 billion. Tax revenues would drop an estimated 9.3 percent and Medicare spending would rise 2 percent, according to the analysis, while a severe recession could have a fiscal shock totaling $6.8 billion, as tax revenues drop 16.2 percent and Medicare spending rises 2.7 percent.
Even in a moderate recession, Illinois would face “significant stress” on its ability to make required payments to its pension funds, which are already notably underfunded.
“Illinois and Kentucky would incur the largest effects because of their already-sizable pension debts and large baseline [actuarially-defined contributions] as a share of their overall budget,” the report says. “This further underlines how important preparing for economic downturns can be, not only in terms of the near-term economic impact but also because of the long-term structural damage that can be done relying on one-time accounting measures.”