How prepared would the Garden State be in the event of another recession?

On Wednesday, the Mercatus Center at George Mason University released a new study ranking each state's readiness to survive a recession, based on the size of its rainy-day savings fund and budget surplus rather than raising taxes or cutting spending.

(Cheryl Casey, ThinkStock)

New Jersey ranked 48th, just ahead of Pennsylvania at 49th and Wisconsin which came in dead last. The report was titled, “Weathering the Next Recession: How Prepared Are the 50 States?”

“In the case of a recession money is set aside to pay for bills when the revenues don’t come in during a recession and in the case of New Jersey, they have zero in that rainy day fund,” said Eileen Norcross, partner and director for the state and local policy projects at the Mercatus Center. “To weather a typical recession they would need about $1.82 billion. That’s close to six percent of its revenue.”

To survive a severe recession New Jersey would need to have 15.4 percent of its revenue set aside or $4.84 billion said Norcross who commissioned the study.

“In order to survive, they (New Jersey) have to save about $1.8 billion. Otherwise they’re looking at raising taxes (and) cutting spending if we were to experience another recession. The state is faced with little room to maneuver because they’re experiencing budget difficulties and they’ve already got a tax system with high income taxes, high property taxes,” Norcross explained. “What are they going to turn to? If they don’t have the money socked aside they’re looking at tough choices during a recession.”

The ranks the Garden State 45th in its ability to weather a recession by relying on its rainy day fund only and not cutting spending or raising tax rates:

  • 2014 rainy day fund balance: $0.00 billion
  • 2014 state revenue: $31.42 billion
  • Rainy day fund as a percentage of state revenue: 0.0%

New Jersey ranks 47th in its ability to survive a recession by relying on its rainy day fund or general fund rather than cutting spending or raising tax rates:

  • 2014 rainy day fund balance plus general fund balance: $0.30 billion
  • 2014 state revenue: $31.42 billion
  • Rainy day fund plus general fund as a percentage of state revenue: 1.0%

Combining the two ranks with and without factoring in the general fund surplus is how New Jersey’s overall ranking became 48th, Norcross said. Is this a problem the state can solve? Maybe.

“What states can do is basically be disciplined about depositing money into the rainy day fund and being disciplined about when they take it out,” Norcross advised. “The best that they can do is to put a rule in place, a strict rule that says, ‘We have to deposit X amount every fiscal year and it can only be used in the event of a recession when we lose X amount of money.’”

Norcross conceded it would be hard for New Jersey do annually dedicate money in the way she described due in large part to structural deficit problems.

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