NJ Spotlight: Low Budget Reserves Make NJ Vulnerable if Economic Headwinds Kick Up

New Jersey and many other states have been able to boost budget reserves during the long recovery from the Great Recession. But that doesn’t mean state budgets aren’t vulnerable to the next economic downturn — and perhaps New Jersey’s more than most because of its still relatively scant budget reserves.

A new analysis from The Pew Charitable Trusts raises several concerns for states as they get ready to face the next possible recession, including how a major downturn could impact already volatile revenue sources like the income tax, which is a major source of funding for New Jersey’s budget.

Meanwhile, a recent report by Fitch Ratings, a Wall Street credit-rating firm, suggested states could begin to lose out on federal funding if a recession triggers belt-tightening by the federal government. By contrast, New Jersey received millions in aid from the federal government in the aftermath of the 2007-2009 Great Recession, initially helping it avoid major cuts to things like K-12 school aid.

The risk could also extend down to local governments, Fitch warned, since they rely on funding from federal and state budgets as well.

“To maintain (credit) ratings, state and local governments would need to demonstrate their ability to manage through a federal deficit reduction in a manner that retains an appropriate level of financial flexibility,” the Fitch report said.

Read the full report here.