Illinois is just one of two states poorly prepared to weather the next major downturn in the U.S. economy, a new report said Monday.
Moody’s Investors Service said most states would be able to withstand a moderate recession without taking a big hit on their credit ratings. Illinois and New Jersey are the exceptions.
Both Illinois and New Jersey have low reserve levels compared to the revenue hits the states could take in a recession. The states also share a high pension liability, said Emily Raimes, a Moody’s Vice President-Senior Credit Officer.
Illinois Gov. J.B. Pritzker recently backed off a plan to extend the so-called “pension ramp” by cutting payments to Illinois’ pension funds after the state pulled in $800 million more in revenue than initially expected in April.
Raimes pointed to Pritzker’s moves to improve pension funding and balance the budget as positive factors. Pritzker has introduced a slate of proposals to generate new revenue for the state of Illinois, including legalizing recreational marijuana, imposing a new tax on plastic bags, and amending the state constitution to allow for a graduated income tax structure which would shift more of the tax burden to high earners.
Moody’s said the states with the most historically volatile revenues either rely on their highest earners, like California and New York; or are largely dependent on the energy sector, like Alaska, North Dakota and Wyoming.
Illinois credit is currently rated Baa3 by Moody’s, or one level above a junk rating.
The credit rating agency said strong financial flexibility will be key to getting through the next recession relatively unscathed. This includes powers to more easily adjust spending, raise extra revenues, borrow money, or defer payments.