Connecticut is “poorly poised” to handle a moderate recession when compared to other states, according to a new analysis by Standard & Poor’s Global Ratings Tuesday.
The ratings agency evaluated the ability of the 10 most debt-burdened states to respond to significant fiscal stress. It determined the first year of a moderate recession would cost Connecticut $1.15 billion in revenue, which far surpasses the state’s reserve fund, currently about $127 million.
“We believe the state has a good history of mid-year budget monitoring and in recent years has made mid-year budget cuts to restore structural balance,” the report said. “However, structural balance may become more difficult to maintain in a recession scenario due to the state’s rising fixed costs.”
The report found that these “high fixed costs” – tax-supported debt service, pension contributions and other post-employment benefits – would consume a substantial portion of revenue.
Researchers at Standard & Poor’s say state revenue relies heavily on its top taxpayers, many of whom would see a significant decline in capital gains during a recession. This would, in turn, lead to a decline in the state’s capital gains tax revenue.
The report also says the state would be “doubly vulnerable” to a recession because of recent overestimations of income tax revenue.
Ben Barnes, Gov. Dannel P. Malloy’s budget chief, said the report “reads very much like the governor’s budget address from February.”
“We are in a new economic reality, and we must adapt to it,” Barnes said. “We are in a far better position now than we were in 2010, which has required making difficult decisions and cutting spending far deeper than the legislators would like.”
“We will continue to act in the best interest of the state moving into the future and ensure we can limit the shocks of the next recession.”
Offsetting the state’s costs by increasing taxes would be “politically difficult,” the S&P report concluded, because of previous major tax increases under Malloy in 2011 and 2015, as well as the public perception of General Electric’s decision earlier this year to relocate its headquarters from Fairfield to Boston.
Senate Minority Leader Len Fasano, R-North Haven, said it is no coincidence that the report’s findings were released as Rogers Corp. announced Monday it would move its headquarters from Killingly to Arizona and Optimum announced Tuesday it would lay off 600 workers in Shelton.
“You can’t tell me these events have nothing to do with Connecticut’s economy, or that they will have no effect on the already challenging situations our families are facing,” Fasano said. “They mean less economic development here. They mean more people out of work clamoring for the limited amount of jobs available.”
Standard & Poor’s announced in May it would lower Connecticut’s bond rating to “AA-” but maintain a “stable” outlook for the state.
The report found three other states – Illinois, Pennsylvania and New Jersey – are also significantly less prepared for an economic downturn, and that the majority of the 10 states analyzed have a “limited capacity” to respond. All told, the researchers concluded, the 10 states could lose $27 billion in revenue.
The ratings agency said it has increased its projection for the possibility of an economic downturn in the next 12 months, putting it between 20 and 25 percent.