S&P Global Ratings , a Wall Street credit ratings agency released a report August 9 that suggests New Jersey’s budget could be in danger in the event of a recession.
The ratings agency analyzed the ten states with the most tax-supported debt, and found that New Jersey is one of the most susceptible to significant fiscal stress. The agency said in its report that the state now struggles to adequately fund education and infrastructure and depends on one-time revenue injections, such as pulling from its reserves, to close budget gaps.
“Among the states in our sample, New Jersey was among those exhibiting the highest volatility,” the report said. “Despite a period of economic expansion, New Jersey has already been operating with a structural imbalance and has had to limit programmatic spending to make way for growing fixed costs, such as for pensions and debt service.”
S&P ran a simulation of what would happen to the state’s budget in a moderate recession, and found that the three largest sources of revenue – income, corporate, and sales taxes – would decline substantially. Specifically, the three sources would decrease 8.2 percent from the FY 2016 budget and 9.3 percent from FY 2017 budget. Medicaid spending would only increase by 1.1 percent, given the state’s high income levels.
The state would probably need to employ several strategies, such as taking some money from its reserves, reducing or eliminating its pension payments, or deferring or reducing some spending.
“The state would likely have to take a multi-prong approach to closing its budgetary gap – one which could further weaken credit quality,” the report said.