AP Photo/Steven Senne
Last month, the Pew Charitable Trusts released its "Rainy Day Funds and State Credit Ratings" report, which explored how state policymakers can avoid damaging credit-rating downgrades. "In times of economic expansion, the agencies will reward states that deposit growing revenue as a cushion against future budget gaps when the economic cycle declines," Pew noted.
Pew spotlighted Massachusetts, where Republican Governor Charlie Baker and state legislative leaders steered $200 million into the state's stabilization or "rainy day" fund in fiscal 2016 in the hope of staving off a black mark from Wall Street's powerful credit-ratings agencies. The state's move came after finger-wagging from Standard & Poor's about the Bay State's bad habit of dipping into the fund to plug budget holes and failing to adequately replenish it-a strategy that both Baker and Deval Patrick, his immediate Democratic predecessor, have used, and state lawmakers have sanctioned. In the latest budget, administration officials also noted that since the first Wall Street warnings, the rainy-day fund had grown by about 20 percent, from $1.1 billion to $1.3 billion. The state spending plan also included a new proposal to build up the fund.
But Massachusetts apparently did not do enough. S&P Global Ratings recently downgraded the Bay State's credit rating from AA+ to AA, a blow to New England's economic engine and for Baker, whose state budget expertise helped propel him into the governor's office. S&P Global Ratings faulted the state's failure to shore up the fund, cautioning that "the decision leaves [Massachusetts] on a course to experience greater fiscal stress in the event of an economic downturn or if federal funding were capped or trimmed in a material way."
In a political climate defined by President Trump's preoccupation with tweeting his way out of the Russian political crisis and his intention to unleash debilitating spending cuts on states, it's worth considering just how much more fragile the economic outlook is for some states.
A credit downgrade is never good news, but the Bay State is flush and well-functioning compared with Illinois, where another Republican governor, Bruce Rauner, and the Democrats who dominate the state legislature have been mired in fiscal mayhem. Illinois is in the worst shape of any state in the country. It has not passed a budget in several years, leaving many state agencies from the courts to public schools and universities in financial limbo; has $14.5 billion in bills that have yet to be paid; and is suffering through an impasse between the governor and state lawmakers over state and local tax policies. Rauner's insistence on attaching extraneous right-wing conditions to his budgets-decimating public-sector unions, for one-has made it impossible for the Democratic legislature to meet him halfway, and they've lacked the votes to override his vetoes of the budget bills they pass. Both Moody's Investors Service and S&P Global Ratings have put Illinois on notice that the state is on a fast track to junk-bond status.
New Jersey is in a similar fix. Its troubles center on an enormous public-sector pension debt of nearly $50 billion. Moody's has downgraded the state's rating 11 times in seven years, all under Republican Governor Chris Christie-the most downgrades under any state chief executive in U.S. history. S&P Global Ratings also has downgraded a number of other states since last year, including Alaska, Louisiana, Kansas, Kentucky, New Mexico, North Dakota, Oklahoma, and Wyoming.
Illinois and New Jersey may lie at the extremes, but some states are moving into a new period marked by significant revenue shortfalls that have not met projections due to low oil prices (Alaska), or shortfalls from corporate franchise taxes (New York), or low sales and income taxes (Mississippi). The National Conference of State Legislatures' Spring 2017 budget update found that 22 states dealt with or would have to deal with shortfalls before the end of their fiscal seasons.
While some of these problems are self-inflicted, resting on choices that states make or forgo, and others are consequences of the narrowness of the economic recovery, the federal government could massively undermine state fiscal health even more. The American Health Care Act (AHCA), if passed, would likely block-grant Medicaid and force states to replace federal dollars if they want to preserve current levels of care. Yet Medicaid is just the beginning. President Trump's budget also proposes to slash nutrition, social service, and temporary financial assistance entitlement programs for poor and low-income people as well as funding for many other programs that states rely on.
Not only would these cuts hit states hard in fiscal 2018, to the tune of $44 billion or 5 percent of state general funds; they would increase in outlying years as the federal government shifts more of the fiscal burden to the states, adding up to an astronomical $453 billion or nearly 40 percent of state budgets by 2027, according to a new Center on Budget and Policy Priorities report. That type of spike would leave state and local officials with two equally unpalatable choices-massive tax hikes or deep service cuts.
Beyond calling the AHCA that he once applauded "mean," President Trump has had little to say about promoting state fiscal health-or what safeguards might have to be put in place if these strains grow worse, or how they might affect the country's overall economic well-being. For a White House consumed by scandal, state creditworthiness doesn't rate. It doesn't take much to see that these new fiscal stresses don't amount to a hill of beans in this crazy world.
