Is Maryland Prepared for the Next Recession?

Separate, in-depth reviews released in recent days by two major credit-rating agencies say nearly a quarter of all states are well-positioned to handle the first-year shock of a recession with their reserves — and Maryland is not one of them.

It has been more than nine years since the end of the last recession, the third longest period of expansion in U.S. history, and state and local governments across the country are beginning to look ahead to the next economic downturn. The Great Recession was uniquely devastating for states and localities because it hit all three major tax revenue sources: income, sales, and property. It was a scenario that few, if any governments, were prepared to absorb. As a result, governments were forced to make massive budget cuts.

According to separate analyses conducted by S&P Global Ratings and Moody’s Analytics, a typical state would need to have approximately 11% of its general fund revenues put into a reserve fund to weather the next recession without having to raise taxes or cut spending. To weather an even larger downturn, akin to the Great Recession, a typical state would need almost 18%.

According to Governing:

S&P and Moody’s stress-tested state budgets in their analyses. The idea, which was borrowed from the U.S. Federal Reserve, is to essentially throw different economic scenarios at a state budget to see how revenues would be impacted. Analysts found that states with a progressive income tax structure or states that are dependent on a volatile revenue source, such as oil and gas, tend to have more wild revenue swings in the event of a fiscal shock.

A total of 20 states have enough in reserves to get through a downturn comfortably, according to S&P. Moody’s found that 23 states are well-positioned when including other funds available to buffer the budget. That’s up from the 16 states Moody’s found last year when it issued its first stress-test analysis. Both analyses found that roughly a dozen states almost have enough in reserves to weather a moderate downturn.

But both analyses noted that an alarming number of states are still unprepared to get through even a moderate downturn without resorting to cuts. Moody’s found 17 states are in that category, up from 15 states last year. For S&P, 18 states have less than 70 percent of the reserves they need to absorb a fiscal shock.

What does this mean for Maryland?

The (relatively) good news: Maryland is within 2.5% of reserves it would need to weather a moderate recession this fiscal year. The bad news: Maryland would need to either raise taxes or cut spending by 7.9% of its entire budget if a severe recession were to impact the state this fiscal year.

According to Moody’s, Maryland “almost has enough” to weather a moderate downturn, but is “significantly unprepared” to weather a severe recession.

Both firms noted that governments have time to get ready. Economic forecasts predict the economy will continue to grow or be stable over the next year.

Read the full article for more information.

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