TRENTON — A bit of sobering but unsurprising news this week from Moody’s Investors Service, which says New Jersey is one of two states in the worst position to cope with a potential recession.

A meager surplus and whopping pension liability are the prime culprits. New Jersey ranked around the middle of the pack for its revenue volatility and financial flexibility for responding to a downturn.

“Twenty-two states are better prepared. Most are moderate, and only two are less well-prepared – that’s New Jersey and Illinois,” said Emily Raimes, the report’s lead author and a vice president and senior credit officer at Moody’s.

Raimes said Moody’s looked at each state’s biggest single-year revenue decline since 1990 and compared a repeat of that loss against the state’s current surplus. Only Pennsylvania rated worse.

“New Jersey has very low amounts of reserves and so would not be able to cover much of a revenue decline with available reserves and would have to turn to other measures,” such as spending cuts or tax increases, Raimes said.

Adding to New Jersey’s potential headache is the state’s pension liability. Moody’s estimates that if the stock market drops significantly as part of a recession, the Teachers’ Pension and Annuity Fund could be left with enough assets to pay just four years of benefits to retired educators.

“The pension burden is such a large and looming problem that a recession is going to make that worse,” Raimes said.

New Jersey is rated as one of three states whose pension funds are at the most risk in a recession.

The report is reinforcing, not recalibrating, the debate at the Statehouse over state finances. The Murphy administration says it’s proof a bigger surplus is needed. The Senate president says it’s evidence long-term spending cuts are required.

State Treasurer Elizabeth Maher Muoio said many of Moody’s sentiments line up with her budget testimony to the Legislature: New Jersey must grow its surplus, which even at the 3 percent proposed is far below the recommended average of 10 percent of the total budget.

Muoio said “savings, surplus and sustainable revenues are the key” to stabilizing the budget.

“New Jersey has been punting on its responsibilities for far too long. While our projected surplus is certainly better than the far too risky position New Jersey had become accustomed to in recent years, we are still far behind most states when it comes to being adequately positioned to weather a future economic downturn,” she said. “This administration is committed to better preparing us for the future.”

Murphy is proposing a $1.139 billion budgetary fund balance to end the current fiscal year and begin fiscal 2020, plus a $317 million payment into the “rainy day” surplus revenue fund – which hasn’t had money in it since 2008, when it was drained to cope with the Great Recession.

Senate President Steve Sweeney, D-Gloucester, said the state has too many immediate needs – for things such as NJ Transit, raises for direct support professionals and  pre-K expansion – to put money into the rainy day fund.

“A rainy day fund is when you’ve paid all your bills and you’re meeting all your obligations, and then you have money left over. Right now, it’s still raining in New Jersey,” Sweeney said.

Sweeney said Moody’s is “100% correct” about the state’s recession readiness but that the cure is reducing what the state spends on public workers’ pensions and health benefits, not expanding the surplus and hiking income taxes on income over $1 million as proposed by Murphy.

“If we want to get ready for the next recession, then we need to go into overdrive on cost saving measures,” Sweeney said. “By its very nature, a recession reduces revenues, so revenue raisers are far less effective than reducing costs. The best strategy for us in a recession is getting a jump on cost cuts especially with ensuring our debt obligations.”

Asked about the developing debate about this year's rainy-day fund deposit, Raimes said Moody's doesn't provide advice to states about what steps to take.

"We don't sort of advise and want to tell any states what they should do," Raimes said. "I can say that $300 million would, for a state with the budget the size of New Jersey, $300 million would be some additional cushion but it really wouldn't be significant."

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