Moody’s economic report: Pennsylvania not ready for next recession

Pennsylvania state capitol building in Harrisburg, Pa.

Pennsylvania state capitol building in Harrisburg, Pa. (Lindsay Lazarski/Keystone Crossroads)

It’s been about a decade since the Great Recession and a new report from Moody’s Analytics shows Pennsylvania is one of at least 15 states that are “substantially underprepared” for the next economic downturn.

After the financial crisis in 2008, the Federal Reserve required the nation’s largest banks to undergo a “stress test” evaluating whether they could survive an economic shock. Moody’s Analytics applied the same concept to states’ budgets and economies.

Pennsylvania failed its stress test.

Moody’s found the state would need to reserve about 7 percent of general fund revenues each year to absorb the effects of a moderate recession without having to cut spending or raise taxes.

That gap is less than the average of 10.5 percent because of Pennsylvania’s stable tax structure compared to most states. But in terms of filling that hole, the report found Pennsylvania has no appreciable reserves and is actually down 1.8 percent. Only two other states, Arkansas and New Mexico, are like Pennsylvania and have no actual reserves for their rainy day funds.

Dan White, director at Moody’s Analytics, says large structural issues in the state budget, including mandatory spending on Medicaid and pension programs have made it made it difficult for policymakers to plan ahead and prepare for financial troubles down the road.

“At a time when most states are looking forward to the next recession and trying to figure out how they can limit the impact of that recession on their economy and their budget, [in] Pennsylvania, we’re still worrying about how to recover from the past recession financially with our budget,” White said.

White says if long-term solutions to those structural issues are not addressed, when the next recession hits, Pennsylvania could be significantly worse off than other states.

It may not be immediate, but he expects an economic downturn in the next two or three years.

“For the average Pennsylvanian, what this means is that the next time we go through a recession, Pennsylvania is going to have to either significantly increase taxes or significantly cut state spending,” White said. “So either they’re going to be paying more out of their pocket in taxes or they’re going to be receiving fewer services from the state.”

White added that states that faired well in the report have implemented their own stress-testing and have detailed reserve policies to start planning and preparing for the next recession now.

Breakdown of all 50 state’s reserve funds. (Source Moody’s Analytics)

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