How well are the states of the Eighth Federal Reserve District prepared for the next recession?

Economic downturns often force state policymakers to enact sizable tax increases or spending cuts to close budget shortfalls. In this paper the authors make use of a Markov-switching regression model to empirically describe the expansions and contractions in the states of the Eighth Federal Reserve District. They use the estimated parameters from the switching regressions to form probability distributions of the revenue shortfalls states are likely to encounter in future slowdowns. This allows them to estimate the probability that each state's projected fiscal-year-end balances will be sufficient to offset the fiscal stress from a recession.