One of the activities that federal banking agencies have started since the Great Recession is “stress testing” banks where they mimic banking downtown events and see how the bank structure would handle these “stresses” on bank capital and financial structure.
Standard & Poor’s and Moody’s have both done a similar thing to gauge how well-prepared states are for an economic slowdown. S&P and Moody’s both used measurements based on a “moderate recession” (approximately 75 percent of the past recession) and a “severe recession”
Background on S&P’s reasoning
S&P asserts that there has been a general drifting of states towards less financial stability even during the recovery years pointing out that there are now nine states below “AA” rating whereas there were only 6 in 2013. Also there are now 5 states below “AA” rating with the lowest, (Illinois) at “BBB.” Unfunded pension and retiree health benefits are the main culprits.
States bound by declining revenue & increasing expenditures
States’ budget pressures sources include:
- Shallow economic expansion-Revenue growth has not kept up with growing expenditures
- Growth in nondiscretionary or inflexible expenditures including Medicaid, Pension contributions and Retiree Health Benefits
- Increased revenue volatility-Long-term greater reliance on the income tax, particularly in states with progressive rates. Also sales taxes suffering from growth in services and other non-taxed areas.
Factors used to evaluate
S&P looked at six measurements to judge a state’s ability to withstand either a moderate or severe recession mostly based on reserves and fixed costs.
Georgia was one of 21 states to have a moderate risk of susceptibility to recession. Fifteen states had an Elevated risk and only 14 states had a low risk.
Here are Georgia’s percentages:
9% Percent 2018 Budget Reserves
10% Percent Revenue Shortfall-Moderate recession
11% Percent Revenue Shortfall-Severe Recession
2% Per Cent Increased Medicaid Expenditures (Due to Recession)
120% Reserves as a per cent of Fiscal Shock (Moderate)
101% Reserves as a per cent of Fiscal Shock (Severe)
Georgia was listed in the “moderate” risk category meaning the state could withstand first year shortfalls of 9 percent to 14 percent.
Moody’s report
Following on their 2017 report, Moody’s provides an update using 2018 data nearly a decade since the Great Recession. By analyzing different scenarios of fiscal stress that could be applied to state budgets during a recession situation, the fitness of state’s budget reserves are evaluated.
Almost half have sufficient reserves
Under their analysis Moody’s found that 23 states have the funds in their revenue shortfall reserve or rainy day funding to weather. Ten additional states have most of the funding they may require. Finally, 17 states have significantly fewer funds than they may require. Using the Moody’s methodology, states with more volatile revenue collections and histories of very large rainy day fund balances are considered the best positioned.
Fixed costs like Medicaid
are countercyclical
Moody’s examined both revenues and spending, pulling in analysis related to Medicaid impacts during a recession, while tax revenues are falling. The demand for state services in unemployment and Medicaid also increases expenditures in those areas. Moody’s analysis demonstrates that “by regularly outpacing revenues, the zero-sum nature of state budgets has made Medicaid a much larger portion of total state spending over time.”
Also this year, Moody’s incorporated a look at state pensions as a factor in their stress testing of state budgets.
Moody’s analyzed forecasts for state-level actuarial determined contribution rates and stressed them the same lines as the Medicaid scenarios.
Because pension payments are made over a number of years, no single scenario had a large immediate impact, however under moderate and severe recession simulations, state actuarially determined contributions would increase just under 1 percent of overall state revenues. The best situated states had lower current pension debts, where those with large unfunded liabilities were already stressed and the recession exacerbated their problems.
Georgia’s measurements
in the Moodys’ test
In the “Moderate” Recession Test, Georgia’s numbers were:
-9.0% Per Cent Tax Revenue Shortfall
($2,145.84 million) Shortfall in Dollars (Due to recession)
0.9% Per Cent Medicaid spending increase (Due to recession)
$210.57 million Medicaid Spending Increase in Dollars
-9.9% Per Cent Combined Fiscal Shock
($2,356.41) million Combined Fiscal Shock in Dollars
Georgia is apparently in pretty good shape with its reserves approaching $2.7 billion and a relatively good handle on fixed expenditures like Medicaid, retirement contributions and retiree health benefits.
Moody’s Report can be found here:
https://www.economy.com/stress-testing-state-and-local-reserves
S&P Report can be found here:
https://www.capitaliq.com/CIQDotNet/CreditResearch/RenderArticle.aspx?articleId=21010
