(The Center Square) – A credit rating agency expects U.S. states to make it through a shallow recession in 2023 by using reserve funds, tax and fee increases and expense cuts.
S&P Global Ratings’ economists expect a recession for the first six months of 2023 that states should be able to weather without credit challenges. In part, that’s because many states are sitting on federal money given out in response to the COVID-19 pandemic.
“Another reason why states are in a good liquidity position is the significant federal stimulus aid still on hand,” according to the S&P report. “The federal government has allocated over $7 trillion in stimulus aid to fight the pandemic and support the economy over the past few years. The largest share of aid given directly to states was in the American Rescue Plan, with nearly $200 billion allocated to the states and territories.”
Roughly 21% of that federal money has yet to be appropriated, according to the report.
State-held reserves have increased from about $80 billion heading into the pandemic to about $136.5 billion at the end of fiscal 2022, according to S&P tabulations. That’s a 70% increase over three years. That money won’t last forever, but it could provide a cushion for states.
“Much of the existing aid will be spent through fiscal 2026, providing both internal liquidity in the short-term and funds for capital requirements in the longer term. So, although the impact of a potential fiscal cliff caused by the depletion of federal aid is a current topic in the market, we view the coming change for states as more of a gradual slope than any type of precipice,” the authors wrote.
S&P economists gave the sector a stable outlook.
While U.S. states as a group are considered stable by S&P, Alexander Salter, the Georgie G. Snyder associate professor of economics at the Rawls College of Business at Texas Tech University, said some states are in a better financial position than others.
“There’s already a massive divergence in state finances – California, for example, has blown through its COVID largesse, whereas Texas is doing quite well, retaining a $27 billion surplus,” he said.
California faces a $22.5 billion shortfall in its budget for the 2023-24 fiscal year, according to Gov. Gavin Newsom’s budget proposal.
The S&P report also said that states could become less generous with taxing bodies they help support, such as local governments.
“States have an advantageous, although at times divisive, ability to share fiscal challenges with other related governments,” according to the report. “In prior recessionary periods, we have seen states cut aid to local governments and other authorities, and believe this could happen again should the recession be longer and deeper than our economists forecast.”