By Stephanie Kelly
NEW YORK (Reuters) – Several U.S. states studied by S&P Global Ratings are ill-equipped to deal with an economic recession, hampered by the slow rebound in U.S. economic growth after the damage wrought by the Great Recession.
Fiscal imbalances, slower state tax revenue growth and increased spending on social services have contributed to a challenging economic landscape, as real GDP has only increased at 2.1 percent per year since 2009, S&P said in a report issued on Tuesday.
Real U.S. GDP growth of 2.43 percent in 2014 and 2015 compared to pre-recession rates of 3.79 percent in 2004 and 3.35 percent in 2005, according to data from the World Bank.
To determine states’ fiscal capacity to withstand the first year of a hypothetical recession, S&P sampled 10 states, the report said. The study found that a collective revenue shortfall would eclipse the states’ combined budget reserves by $5.4 billion.
Of the 10 states studied, several have budget reserves that equal less than half of “potential revenue underperformance” in the first year of a moderate-intensity recession. These include Illinois, Pennsylvania, New Jersey and Connecticut.
Washington, Florida and New York would fare best, with reserve balances that exceed potential shortfalls. The remaining states sampled, California, Massachusetts and Wisconsin, fall between those two groups.
“Fiscal alignment” is an important indicator of a state’s ability to recapitalize budget reserves, the report said.
“Therefore, it’s no coincidence, in our view, that the four states in our evaluation we found to be most fiscally vulnerable to a recession have also struggled with chronic structural budget imbalance,” it said.
States have also raised spending on public welfare, such as Medicaid, and pension benefits. Spending on entitlements increased to 40 percent in 2013 from 34 percent in 1995 as a share of total state spending, the report said.
This has reduced the states’ ability to finance infrastructure and higher education — pro-growth ventures, it said.
Britain’s decision to leave the European Union in June and a slowed rate of job growth in the United States have increased economic concerns. However, it said there is still only a 20 to 25 percent chance of a recession occurring in the next 12 months.
(Reporting by Stephanie Kelly; Editing by Daniel Bases and David Gregorio)