Nearly a Dozen States Are Suffering From ‘Chronic Budget Stress’

Nearly a Dozen States Are Suffering From ‘Chronic Budget Stress’


No state has defaulted on its public debt since the 1930s. Despite many near misses more recently, the possibility of any state going under financially is remote at best.

Yet a senior official at S&P Global Ratings, a premier government credit rating agency, warned on Tuesday that nearly a dozen states with festering budget problems and woefully underfunded employee pension programs are struggling through “chronic budget stress” that could push them to the brink.

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“This long period of relative calm may have lulled some people into complacency when it comes to state finances [but] it shouldn’t have,” Gabriel Petek, a managing director and expert on state finances at S&P Global Ratings, wrote in The Hill. “We now see a profound shift unfolding in states such as Illinois, Kentucky and New Jersey, whose pension systems are funded at distressed levels.”

Since January 2016, S&P Global Ratings has issued 11 state credit rating downgrades and only two upgrades. States that received negative ratings or “outlooks” ranged from Alaska, Wyoming and North Dakota to Oklahoma, Louisiana, Kansas and New Mexico. But far and away the three most problematic states are New Jersey, Illinois and Kentucky.  

In October 2016, for instance, S&P Global Ratings dropped Illinois' credit rating one notch to BBB, virtually junk bond status and the lowest rating of any state. S&P warned that the rating could fall even further unless Republican Gov. Bruce Rauner and his Democratic opponents in the state legislature come to an agreement on a long-term solution to Illinois’ chronic budget deficit and pension problems.

The impasse is so great that the two sides have been unable to agree on a new budget for nearly two years.

Related: Illinois Is Not Alone: States Facing $1 Trillion Pension Shortfall

Last November, S&P Global Ratings downgraded New Jersey’s credit rating from “A” to “A-minus” after citing the state's struggling pension system and a recent, ill-conceived deal between Republican Gov. Chris Christie and Democratic lawmakers to cut more than $1 billion in taxes at a time when the state lacked sufficient revenue to cover its obligations.

The nation’s three top credit rating agencies -- S&P, Fitch Ratings and Moody’s Investors --  have now downgraded New Jersey for a total of 10 times. Christie, an unsuccessful 2016 Republican presidential candidate who was later passed over by President Trump for a cabinet post, is struggling to hold the state together financially before he leaves office.

Finally, last January, S&P raised a red flag regarding Kentucky’s $32.6 billion public pension debt. The credit rating agency revised its outlook on Kentucky from stable to negative, just as the state was getting ready to hold a bond sale.

The lowered outlook reflected the reasonable likelihood that S&P would further lower the rating sometime over the next two years, making it more expensive for Republican Gov. Matt Bevin and the state government to borrow.

Many factors have adversely impacted state finances. For instance, low oil prices help to explain fiscal gaps for the leading energy states, such as Alaska, North Dakota and Oklahoma. Moreover, slower revenue growth, declining worker-to-beneficiary ratios in state retirement systems, and rising Medicaid enrollments “are widespread and have meant that fiscal stress is no longer confined to recessionary times,” Petek wrote.

Related: States Keep Using Gimmicks to ‘Balance’ Their Budgets    

“This stress is leading states to forego crucially needed investment in infrastructure and higher education,” he added.

Although a handful of states including West Virginia, New York and Indiana have made important strides in reducing major shortfalls in their employee pension plans, many others are just treading water or losing ground, as The Fiscal Times reported last year. A study by the Pew Charitable Trust renewed its warning about a widening gap between assets and obligations.

State-run retirement systems reported shortfalls totaling $934 billion in fiscal 2014, the latest figures available, which was a slight improvement over the $969 billion deficit from the previous year. Many states were fortunate to make smart investments to chip away at their pension fund shortfalls. Others were not so fortunate.

To be sure, says Petek, states continue to benefit from certain “inherent advantages” that result in mostly high credit ratings and low borrowing costs. Among these advantages are legally imposed controls against financial excess such as balanced-budget requirements and limits on borrowing.

Related: Anti-Tax GOP Governors Find It Hard to Hold the Line 

Still, states face “asymmetric” budget challenges, according to Petek. While the budgetary gains to states during the current expansion have been relatively modest, “recent downdrafts have been severe.” State revenue trends over the past half-century illustrate the problem. Between 1951 and 2001, state revenues received the aggregate never showed year-over-year declines – all in all, a stellar performance.

Yet aggregate revenues have shown year-over-year decline three times in the past 15 years. The sharpest decline occurred in 2009 when aggregate revenues dropped 8.5 percent.

With a new Republican president and Congress seeking deep cuts in most domestic spending to offset a major boost in spending for defense and homeland security, Petek cautions that states likely must “go it alone” the next time a recession strikes.

“In our view, it’s unlikely that in a downturn the current Congress would deliver enhanced aid to states via Medicaid as previous Congresses did in response to the last two recessions,” he wrote.