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MOODY'S REPORT: NJ Prepared for Moderate Recession

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(The Center Square) – New Jersey is better positioned financially to weather the impact of a moderate recession than many other states in the Northeast, according to a recent report.

The report by Moody's Analytics shows New Jersey is among a majority of states that have cash balances large enough to survive a recession without having to resort to spending cuts or tax increases of more than 5% of their budgets.

Moody's economists ran "stress tests" to gauge each state's recessionary needs in the event of a moderate recession. The study takes into account the impact of the business cycle on state revenues and spending over two fiscal years.

In New Jersey, the state would see revenues decline by 8.9% or about $4 billion over the two fiscal years, while Medicaid spending would increase by about 1.5% or more than $729 million, according to the Moody's report.

The combined fiscal shock of lower revenues and higher spending needs through the end of fiscal 2024 would be about $5 billion, or 10.5% of the state's general fund budget.

The report also looked at how much states had in reserves or "rainy day" funds as a percent of its 2021 general fund revenues, and how much of that fund would be depleted amid the "fiscal shock" of a moderate recession.

New Jersey set aside about 14% of its state revenues into its reserve fund, which grew its savings to $2.4 billion by the end of fiscal 2021 – its largest annual increase in more than 20 years.

Under a moderate recession the state would see its reserve funds depleted by more than 10.5%, according to Moody's report.

That's still better than other states in the Northeast, including New Hampshire, Maine, Pennsylvania and Illinois, which were among a handful of states that are poorly prepared for a recession, according to the Moody's report.

"States that shuttled surplus tax revenues into rainy-day reserves and avoided spending one-time stimulus funds on recurring expenses will be better able to weather any such downturn," the study said.

Overall, a majority of states have the resources needed to get through an economic recession, Moody's found, with a record 43 states having the cash they need to weather an economic slump without having to resort to deep spending cuts or tax increases to offset the loss of revenue.

Among the states that are flush with cash to absorb the hit from a recession are California, North Dakota, Wyoming, Delaware and Idaho, according to the report.

"States have never been in a better position to make it through a recession," Emily Mandel, the study’s author, said in a statement. "State policymakers seem to have learned a valuable lesson from the Great Recession, a period when tax revenue losses far outstripped savings."

States that are overly dependent on tourism and consumer spending will be hardest-hit during a recession, according to the study, while those with agriculture and energy-based economies are in a better position.

Moody's says the report is meant to inform policymakers and other key stakeholders about the broad fiscal risks of the next recession on state budgets and their economies and points out that the estimates are limited by the availability of data provided by state governments.